1mania4u

Another Crisis Looms Right Around the Corner

samvak.tripod.com/nm04...

Economics acquired its dismal reputation by pretending to be an exact science rather than a branch of mass psychology. In truth it is a narrative struggling to describe the aggregate behavior of humans. It seeks to cloak its uncertainties and shifting fashions with mathematical formulae and elaborate econometric computerized models.

So much is certain, though - that people operate within markets, free or regulated, patchy or organized. They attach numerical (and emotional) values to their inputs (work, capital) and to their possessions (assets, natural endowments). They communicate these values to each other by sending out signals known as prices.

Yet, this entire edifice - the market and its price mechanism - critically depends on trust. If people do not trust each other, or the economic "envelope" within which they interact - economic activity gradually grinds to a halt. There is a strong correlation between the general level of trust and the extent and intensity of economic activity. Francis Fukuyama, the political scientist, distinguishes between high-trust and prosperous societies and low-trust and, therefore, impoverished collectives. Trust underlies economic success, he argued in a 1995 tome.

Trust is not a monolithic quantity. There are a few categories of economic trust. Some forms of trust are akin to a public good and are closely related to governmental action or inaction, the reputation of the state and its institutions, and its pronounced agenda. Other types of trust are the outcomes of kinship, ethnic origin, personal standing and goodwill, corporate brands and other data generated by individuals, households, and firms.

I. Trust in the playing field

To transact, people have to maintain faith in a relevant economic horizon and in the immutability of the economic playing field or "envelope". Put less obscurely, a few hidden assumptions underlie the continued economic activity of market players.

They assume, for instance, that the market will continue to exist for the foreseeable future in its current form. That it will remain inert - unhindered by externalities like government intervention, geopolitical upheavals, crises, abrupt changes in accounting policies and tax laws, hyperinflation, institutional and structural reform and other market-deflecting events and processes.

They further assume that their price signals will not be distorted or thwarted on a consistent basis thus skewing the efficient and rational allocation of risks and rewards. Insider trading, stock manipulation, monopolies, hoarding - all tend to consistently but unpredictably distort price signals and, thus, deter market participation.

Market players take for granted the existence and continuous operation of institutions - financial intermediaries, law enforcement agencies, courts. It is important to note that market players prefer continuity and certainty to evolution, however gradual and ultimately beneficial. A venal bureaucrat is a known quantity and can be tackled effectively. A period of transition to good and equitable governance can be more stifling than any level of corruption and malfeasance. This is why economic activity drops sharply whenever institutions are reformed.

II. Trust in other players

Market players assume that other players are (generally) rational, that they have intentions, that they intend to maximize their benefits and that they are likely to act on their intentions in a legal (or rule-based), rational manner.

III. Trust in market liquidity

Market players assume that other players possess or have access to the liquid means they need in order to act on their intentions and obligations. They know, from personal experience, that idle capital tends to dwindle and that the only way to, perhaps, maintain or increase it is to transact with others, directly or through intermediaries, such as banks.

IV. Trust in others' knowledge and ability

Market players assume that other players possess or have access to the intellectual property, technology, and knowledge they need in order to realize their intentions and obligations. This implicitly presupposes that all other market players are physically, mentally, legally and financially able and willing to act their parts as stipulated, for instance, in contracts they sign.

The emotional dimensions of contracting are often neglected in economics. Players assume that their counterparts maintain a realistic and stable sense of self-worth based on intimate knowledge of their own strengths and weaknesses. Market participants are presumed to harbor realistic expectations, commensurate with their skills and accomplishments. Allowance is made for exaggeration, disinformation, even outright deception - but these are supposed to be marginal phenomena.

When trust breaks down - often the result of an external or internal systemic shock - people react expectedly. The number of voluntary interactions and transactions decreases sharply. With a collapsed investment horizon, individuals and firms become corrupt in an effort to shortcut their way into economic benefits, not knowing how long will the system survive. Criminal activity increases.

People compensate with fantasies and grandiose delusions for their growing sense of uncertainty, helplessness, and fears. This is a self-reinforcing mechanism, a vicious cycle which results in under-confidence and a fluctuating self esteem. They develop psychological defense mechanisms.
Cognitive dissonance ("I really choose to be poor rather than heartless"), pathological envy (seeks to deprive others and thus gain emotional reward), rigidity ("I am like that, my family or ethnic group has been like that for generations, there is nothing I can do"), passive-aggressive behavior (obstructing the work flow, absenteeism, stealing from the employer, adhering strictly to arcane regulations) - are all reactions to a breakdown in one or more of the four aforementioned types of trust. Furthermore, people in a trust crisis are unable to postpone gratification. They often become frustrated, aggressive, and deceitful if denied. They resort to reckless behavior and stopgap economic activities.

In economic environments with compromised and impaired trust, loyalty decreases and mobility increases. People switch jobs, renege on obligations, fail to repay debts, relocate often. Concepts like exclusivity, the sanctity of contracts, workplace loyalty, or a career path - all get eroded. As a result, little is invested in the future, in the acquisition of skills, in long term savings. Short-termism and bottom line mentality rule.
The outcomes of a crisis of trust are, usually, catastrophic:

Economic activity is much reduced, human capital is corroded and wasted, brain drain increases, illegal and extra-legal activities rise, society is polarized between haves and haves-not, interethnic and inter-racial tensions increase. To rebuild trust in such circumstances is a daunting task. The loss of trust is contagious and, finally, it infects every institution and profession in the land. It is the stuff revolutions are made of.

The Coming Consequences of Banking Fraud

It's a system. It isn't fair, it isn't perfect, but seriously, if one has time to write articles and comments on Seeking Alpha, then one is probably not lacking for food, water or shelter, and most likely enjoys a quality of life far greater than many inhabitants of this planet. In addition, enjoying the freedom to say whatever one wants and having rights protected by that system is an amazing thing in and of itself. I share some of Mr Kim's concerns. Collusion, power and greed are endemic to any human system. Certainly the central banks of the world have worked in unison to attempt to place what amounts to price supports under global asset prices, which were deflating so quickly in the 4Q 2008 that the viability of the entire global capitalist system was being threatened. The reality is that this is a SYSTEM, and we are ALL interconnected in it, and the failure of that system was unlikely to improve the life of ANYONE, (minus a select few who rule by fear and pure force). Go out into the Alaskan wilderness without food or shelter for a week on your own and see how long you survive, (or even take food and a four season tent and see how hard survival is).

The truth is that if one is consumed with power and greed, one will reap what they have sown, which is emptiness. Some of the most unhappy people I have ever known are very wealthy. The happiest people I have ever met have invested in friendships and sought a life of helping others. There are certainly people in the halls of our government and banking industry pursuing both paths, so it is not fair to indict ever member of the "system". The truth is that you get what you give.

All this said, I will acknowledge a concern that we witnessed the implosion of an unsustainable overlevered global financial system in the 4Q 2008. This imbalance has clearly required a transfer of much of that leverage onto central bank balance sheets in order to maintain the system and slow the process of correction, which is still in motion. Will this support mechanism be able to be unwound and the financial system be able to be returned to a more "free" market mechanism? This is the $64,000 question, which probably will not be answered until either a bigger imbalance surfaces and creates another crisis, OR the process is slowly unwound successfully. This is very, very difficult to assess.

In the meantime, invest in the lower end of the economic spectrum, that may be our greatest hope.

kiva.org

Due for a Correction? Market Is Already Priced for Grim Future

Your entire analysis is done in the framework of a free market economy, which we do not currently have. All the improvement you have seen in credit spread sattistics has been due to either:
1. transfer of assets to sovereign balance sheets, especially in the G7 nations
or
2. sovereign credit guarantee structures.

Assuming all nations print money to monetize these debt imbalances in a coordinated effort, then all currencies float in equilbrium and there may not be much of a problem. The real problem lies in the ability of government to move the pendulum back toward a more free market economy. One might postulate that we witnessed the implosion of an unsustainable global free market economy in the 4Q of 2008 and now we have a greater form of state sponsored capitalism. Perhaps that is why China has become the new leading global equity market indicator. They are the ultimate state sponsored capitalist system. My hope is that the private sector can continue to equitize debt. While this does not have great implications for equity values, as this clearly causes dilution, it should at least put the private sector in a position to possibly bail out what are increasingly becoming overly indebted sovereign nations as the pendulum swings back the other way. Overly indebted soveriegn nations can lead to sudden fractures in the balance of world economic power and, ultimately, conflict. Perhaps this is the greatest test of the new age of global capitalism.

Sirius XM's Game Changer About to Rock

Pandora is free

Pandora is better than sat radio

I see no need for a sat dock for iPhone or iTouch. My latest vehicle came with SIRI sat radio pre installed and I used it for free trial, then I let it expire. Service was OK, but I do not need it. I can plug my own unlimited tunes in for free in the car. At home, Pandora over wifi on iTouch rocks, and it's free. I think there will always be a market for sat radio, especially if they have exclusive content deals, but it will be limited. The millenial generation (born between 1977-1996, a demographic slightly larger than baby boomer generation)thinks digital content should be free, plain and simple. Their opinions and behavior will drive the future of digital content distribution.

Boomers in Trouble: The Unheralded Economic Mega-Trend, Part 1

Japan's land mass is slightly smaller than California, with a very homogenous population, which is an impediment to a diverse economy.


On Jul 13 07:48 PM jstratt wrote:

> I think you make some excellent points for investors. Stocks future
> value may be restrained by demographics
>
> Take a look at Japan which had their crisis in the 90s and they are
> demographically older than the US. The S&P has outperformed the
> Nikkei by 500% using the yahoo comparison from the 1980s. It is possible
> we we experience the same lack of growth moving forward.

Citigroup: Priced to Succeed

The only thing that is truly important is what does the Government want Citigroup stock to do. Since we, as taxpayers, are already in the game for hundreds of billions invested into C, the only way to recoup that money is to keep Citi alive as a functioning and, hopefully profitable, entity. The federal reserve controls our monetary system effectively as a giant hedge fund with unlimited financial resources, i.e. the ability to print money. As long as the the global financial system will tolerate this strategy, they can do whatever they want and pick and choose who survives and recovers and who does not. The true concern that nobody is really talking about is the possible unsustainable nature of this type financial system in a world where the global economy has become the true governing body that all sovereign powers are actually beholden to. We may reflate our way out of this toxic financial mania we created, but the problems do not actually go away, and they are getting larger under the surface. In an age of electronic credits where more and more participants view money as a game rather than a system to facilitate commece and account for obligation between real people, we are slowly witnessing a diminishing trust in the system with each bubble episode.

To quote Pogo, "We have identified the enemy, and he is us".

High Frequency Trading: We Fear What We Do Not Understand

This excellent commentary from Mr. Armistead, (above comment), bears repeating:

<<
There is ample academic evidence based on working with real data to demonstrate that HFT permits predatory trading on any situation where there is forced selling. A financial institution experiences liquidity problems and needs to sell concentrated positions, the ever vigilant algorithms pick up on it and join the selling, the bottom drops out until the feeding is over. Similarly if a short squeeze gets going the computers will exacerbate that too.

To me the concern here is that the system is inherently unstable, particularly when many participants are highly leveraged.

HFT is a manifestation of financialism: it is trading for trading's sake. The activity does not create any economic value for society as a whole, it attempts to feed at the expense of those who invest the fruits of thrift and industry in the real economy.

As for the alleged benefits of liquidity and narrow spreads, they are irrelevant to those who buy when others sell and sell when others buy.
>>


The issue at hand is not the fairness or unfairness of light speed algorithmic trading systems and who has an advantage. The issue is the possibility of the thesis that the global operating economy has become a "slave" the the global financial system, which is an inherently unsustainable situation. I liken it to the premise of the movie "War Games" (trailer attached), although, instead of global thermonuclear war, we are rapidly progressing to global FINANCIAL war. The building tension of this escapating situation is likely to lead to the same consequence: inequality and conflict, perhaps not between sovereign powers, as each set of government institutions in the developed world knows that thermonuclear war is a lose-lose proposition, but rather tensions from within developed powers that could drastically fracture power structures previously deemed stable and strong, leading to far more unstable and uncertain sovereign regimes.

Indeed, the emergence of the internet has made one thing certain: there are no more secrets.

www.youtube.com/watch?...

Small Vacuum of Time for a Substantial Short-Term Rally

wpdragon writes:

I hope the author isn't saying that by needing capitalism to do its work we should let some huge banks fail. If so he should google CDS and read a bit about that little piece of unregulated, unfettered capitalistic insanity that has had the world on the edge of armageddon the past six months since the capitalists let LEH fail.

Because if he wants to see C go down the tubes to purge the capitalistic excesses of the past 25 years, his 6000 low on the Dow will be 6000 points too high. Mar 13 12:04 PM | Link | Reply +30

<<

It is good to see someone who understands reality. CDS remains the elephant in the room that nobody wants to address, and it's not just an AIG problem, it's a systemic problem of irreversible complexity.

www.wilmott.com/blogs/...

Goldman Sachs Should Hit It Big in 2009

If Goldman Sachs "hits it big in 2009", then we will know we have failed to restructure an imbalanced and unsustainable global financial system and far greater global strife and conflict awaits us in 2010.