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Ygal Schuller
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As a Strategy & Operations Consultant with a credit background and degrees in Finance and History from the University of Texas, I remain dumbfounded by the lack of rational thinking that exists in today's world. Whether you prefer to examine implications of politics or financial markets, i... More
  • Macro: European Banks Have More Holes Than Swiss Cheese

    Show me the money!

    This has been a tremendously poor week for the european banking community: Credit Suisse settled criminal charges with the US Dept. of Justice over decades-long tax evasion practices and Portugal's largest bank, Espirito Santo International, was found to be in a "serious financial position" by KPMG.

    This argument is not meant to re-hash the facts or opinions presented by the media related to these headlines, but rather to draw big-picture conclusions about the structure, enforcement and culture of european banking as a whole.

    What regulatory body can effectively regulate and oversee european banking operations? In the US we have an alphabet soup of agencies fighting over regulatory authority for each individual operating segment (e.g. OCC, SEC, FINRA, PCAOB etc.) Europe's decentralization does not lend itself to facilitated oversight. Once you get past the multitude of languages, ERP systems and work hour expectations, what incentives or punishments actually prevent illegal or unethical behavior?

    Lets take this one step further: Why are European banks allowed to be so levered? European banks give out 150% to 300% as many loans as deposits held while US banks (even those with european operations) distribute a mere 50% to 80% of deposits in the form of loans. During a global catastrophe, these banks would be completely underwater and bankrupt if it weren't for the implicit guarantees and support from their respective sovereign national funds. Naturally, the countrie's wealthiest individuals have an interest in keeping the largest banks afloat and have strong ties to the ruling government party. A bailout is inevitable.

    But then what happens to the sovereign debt of that european nation?

    It's hard for Americans to truly understand this concept because of how unusually flexible the US dollar can be. The sheer number of dollars in circulation and the global implications of trade in dollars protects it from undesirable value fluctuations that would be reflected by Treasury or Federal Reserve monetary expansion policies (e.g. QE- infitity).

    European countries are tied to the Euro and cannot simply print endless amounts of currency to fund government salaries, stimulus and tax incentives, or even infrastructure projects. Most other countries can't really print endless amounts either because their currency will be tremendously devalued, damaging the economy nearly beyond repair (e.g. Zimbabwe & Argentina). European countries must live within their means or ask for an ECB bailout. Inevitably, jobs have been offshored and GDP of european nations has fallen (especially in eastern and southern nations where intellectual property development and technological productivity is severely lacking). European sovereign governments inevitably get stuck with the bill & have no way of paying it, even if they have the next 20-40 years to do so.

    Bottom line: there will be some significant regulatory, monetary and economic challenges in the euro zone in the future... keep clear of the fan folks

    May 21 6:29 PM | Link | Comment!
  • Opinion: To Burst, Or Not To Burst... That Is The Question!

    Fred is a 14-year old boy standing in the mirror deciding whether his sophomore crush is more likely to notice a white head or a red dot in geography class...

    Although the healthy choice for Fred's skin would be to leave the white head alone and let it naturally subside (perhaps dousing it in Proactiv cream), he does not want to take the chance of the pimple developing into a monstrosity that will haunt his yearbook picture for years to come... So Fred pops the pimple.

    Unfortunately, his sophomore crush notices the unsightly consequences and Fred's date-stock declines. However, Fred's yearbook picture is not ruined and thus he is uninhibited from chasing many more crushes over the next three years of high school.

    I apologize for drudging up old suppressed memories... This vignette illustrates the trade-offs faced by Janet Yellen and the Federal Reserve: whether to continue the QE-Infinity policy or slowly let the air out of the proverbial balloon.

    QE-Infinity has proven to be tremendously effective in the short-run; providing liquidity to banks and corporations during a time of extreme precaution following the latest market crash. Although its long-run effects remain unknown, the expansionary policy has repeatedly driven the stock market exchanges to all-time highs in 2013-2014 and it has re-whet investors' appetite for risk.

    Now the reactionary questions begin -

    Is the bubble fully inflated? Will it pop? When will it pop? What will be the trigger event? Should I short the market?

    The rational investor asks himself a different set of questions -

    Am I well positioned to capture gains from capital appreciation? Am I sufficiently diversified to prevent unique or event risk from destroying my portfolio? Am I hedged appropriately in case of catastrophe? What is my contingency plan in case of a market crash?

    In case you were wondering, I am not a hedge-fund manager with a doomsday agenda. Any economist will tell you about the boom and bust cycle, but only brave historical theorists are able to describe how the cycle's oscillations have been amplified and sensitized over time by the increasingly availability of credit, the globalization and interconnectedness of markets and the securitization of tangible assets. Only adequate regulation of financial markets and major industries can mitigate the amplitude of the oscillations that will inevitably make corrections when the market is irrationally exuberant. Unfortunately, this adequate regulation is a concept rather utopic in nature given the modern political construct.


    1. DONT PANIC. Talk to someone who is actually knowledgeable, but don't follow anyone blindly

    2. Don't pretend to be more knowledgeable than you are

    3. Be prepared for any scenario regardless of the perceived probability of that event happening

    4. Live within your means and focus on living a meaningful life

    "Tough Times Don't Last, Tough People Do."
    - Floyd Mayweather Jr.

    Apr 23 2:55 PM | Link | 1 Comment
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