Showing posts with label Recession. Show all posts

Tuesday, March 10, 2015

Generosity Works - Capitalism Works - Markets Work

Is the Capitalist system perfect, no, are there things that we can do better to move to a populous-based free market, yes – the key point to remember, despite its faults, Anglo Capitalism has effected the highest generalized state of being in history. Is there a group of people who have accumulated a large amount of wealth and influence, yes; this is a reality inherent in any human endeavour, influence pools. Please do be reminded that at the height of the Soviet Empire, about 250,000 elites held sway over the whole thing – a completely different kind of 1%, a 1% with police and military.

There are, embedded in our institutions – from Universities to Banks – Trotskys that spring to the surface whenever things go wrong. They are there to try and grab hold of every down cycle and scream from the rooftops about the instability of the Capitalist system and its inequities. They make this noise from the feather bed they want to expand – a large mass of largess from Byzantine structures that tend to breed more Byzantine structures.

It is curious to me that from this lot one hears a constant din of verbiage having as its main thrust MORE REGULATION; it is regulation that provisioned the means for financial deepening to occur. One of the largest negative outcomes of the 2008 financial crisis was the collapse of the US real estate market; the collapse was effected in large measure by Freddy and Fanny Mac – government institutions and companion REGULATION, a regulation which permitted the creation of financial instruments that isolated lenders from risk. When a Trotsky says MORE REGULATION, they mean, another means by which to take more from people actuating themselves in the market. REGULATION IS NEEDED, but regulation that makes transactions transparent and, most importantly, facilitates the markets and the flow of capital.

My Uncle said "bad Conservatism was the birthplace of Marxism"

Mass attracts, it is the case from atoms to planets, and it is the case with capital - as it is with influence. Carl Marx understood this about capital, his analysis was outstanding, his solutions, however, were disastrous. What is required is a means to have people, by virtue of their participation in the economy be able to capitalize on their efforts over time to a sufficient degree, and on a timely enough basis, they can enter commerce. There needs to be a culture of leadership and investment in the business environment at large to seed growth with generous access to capital.

It is critical that capitalism is popularized in an aggressive way to broaden prosperity – a generalized state of prosperity is the goal. There are some in the 1% that are seeking control through power and influence, to them I say, release the inclination to control and enjoy the fruits that accrue to all from prosperity; most importantly, remember there is nothing to fear from prosperous and happy people. There is a large portion of the 1% that are just good at what they do and have accumulated wealth as a result; they know, that prosperity breeds prosperity – they are eager to seed more of it.

The joy of Capital working in a healthy market is that resources pool and flow in very rational ways. One can view Capital as an abstract representation of all energies that supply the human enterprise, there needs to be mechanisms that permit it to pool to a sufficient degree to allow for the “energy” to facilitate the massive undertakings that have provisioned our present state of well-being.

There are reforms required to streamline the financial system, make it transparent and deal with the current state of sustained financial deepening. It is worth remembering, however, that the gestalt that has emerged from the co-existence of a market economy, the financial system and the democratic process has been nothing short of miraculous in what it has provisioned us. The Trotskys are letting “distribution” and “sour grapes” fuel their discontent as a means to spread discontent. Never in history, has a government, formed and actuated with equality as its primary concern, managed to achieve equality or last – a 1% always forms. The focus needs to be on equitable treatment of the populous in general and the opportunity to access capital and the market. Equality will never happen here, but prosperity will, prosperity feeds a generous spirit in society as a whole.

Click An Item of Interest Below - For more thinking on the Subject

Canada - Economic Stagnation Nation?

The Real Economy & The Financial Economy - Harmonics

An Industry Perspective

Click Here to View Details

Sunday, February 1, 2015

Counter Cyclical Spending – Stimulus - Where the smart money goes.

In a healthy circumstance, the government portion of GDP should be about 6%, in Canada federal spending alone is about 10%. There is a gradation of benefit and negative effect, and there is an axis to manage, but at some point, the burden of government is negative.

Counter-Cyclical Spending, or stimulus, is the practice of government drawing on government coffers, normally increasing debt, to counter the negative impacts of a downward business cycle. If the government is of the correct proportion to the economy as a whole or even has the proportion consistent with the present Canadian circumstance, one can see that there is a limit to the effect the government can have just on the basis of monetary mass alone.

It is the case, however, that government can to a limited degree stimulate the economy or direct upward pressure on aggregate demand. The answer to the question as to whether this is a healthy practice or not is determined by the legacy of the effort. If the government chooses to hire a bunch of people and expand services, then there may be short-term gain, with long-term pain – as the overall burden of government is expanded and carried into the future. If, however, the government chooses to INVEST in things that facilitate the future undertakings of the national complex, then the spending both improves the present circumstance by increasing aggregate demand AND makes future activities more efficient. One approach makes the future better, the other approach taxes future generations.

When money is so cheap (2015) - the real cost of money for the Canadian government, if managed optimally, is zero for the next ten years or so, so now is the time to borrow and build out infrastructure – physical & human. Now we make investments in physical infrastructure - communications, fiber optics, high ways, ports, bridges etc. More importantly perhaps, in human capital, no more damn university buildings and ribbon cuttings please, what we need is real money to real people for real knowledge – inputs and outputs quantified and accounted for.

Give Canada’s young people firstly, knowledge, the structure to work in and capital – real investment, with a real accountability trail, and Canada will win-win bigger and better than any other jurisdiction because we make life here better than elsewhere. We should be aiming higher than “jobs”, we should be aiming for exceptional lives.

Monday, October 14, 2013

Discourse on the Great Recession - Harmonic - Financial Economy and the Real Economy

I had a girlfriend once that played a game, when walking and holding hands she would have me relax my arm, as we walked she would swing my arm for me, we would over time be swinging arms back and forth, but having picked up her rhythm, again over time, neither of us would know who was swinging our arms – after a time it became unclear which of us was initiating the motion. I’m unsure what she was up to exactly, it does serve however as a perfect metaphor for the harmonic that exists between the “real economy” and the financial economy. Unlike the chicken and the egg, we know what got here first; we are absent the ability to know which, however, having created the relationship, is initiating action - the real economy or the financial economy.

A harmonic describes a frequency that is an integral multiple of a fundamental frequency, unlike in physics, in the two “economies” harmonics are less clearly identified and asymmetrical at initiation yet constantly seek a revision to an equilibrium – more like colliding cycles – 1000 pebbles on the pond rather than one. It’s this degree of complexity that confounds our ability to assess causation, and worse confounds our ability to offer a rationale to the “consuming public” that is clear and effects confidence. Like Truman said “God please give me a one-handed economist”, with the economy, there are never enough hands.

To illustrate the point, contemplate the money supply relative to the real economy. Money is an abstract entity that we create at will, can effect change in the real economy, more money supply, will for a time and to a point, effect accelerated creation and consumption of goods and services. More money absent the perception of devaluation effects actuation, more money in the presence of generalized knowledge of devaluation effects no change in actuation. When the real economy expands due to supply and demand dynamics the money supply expands and as stated, when the money supply expands so does the real economy. It is this harmonic that is the crux of a central banker’s work; managing money supply to either actuate a contracting or stagnant economy or retard an “over” stimulated one. Once again, this harmonic can feed a rapid upward “spiral”, when confidence is high and the money supply is untethered, and the real economy is vibrant – inflation ensues – a little inflation is good, but a lot is toxic. When we effect a harmonic – tight complementary cycles – we have a vibrant economy and steady growth and improved lives – at any point, however, cycles can extend to create a “positive” feedback mechanism and cycles become more extreme and lives are harmed. Once again accentuating the point that artificial interventions that extend cycles come with risk – as was the case with the great recession.

Tuesday, October 8, 2013

Discourse on the Great Recession – Leverage

Leverage refers to the use of credit to increase returns on a given amount of equity. If one holds $10 in equity – invests it and makes a dollar they have garnered a 10% return; if one uses that same $10 to borrow $100 and invests the $100 and makes $10 – the $10 of equity has garnered a 100% return. This is better, at least, until there is an equal decline in value then losses are as dramatic.

In the Stock market, people have provisioned the ability to borrow using stocks as collateral, when a brokerage (or a provisionary of funds) sees a decline in stock price, their security for the loan, they make a margin call – requiring the borrower to pay back funds. When there is a widespread crisis of confidence, margin calls can generate a cascading event, where, as people liquidate their positions to satisfy margin calls – the value of stock decreases – prompting more margin calls. This transpired at the beginning of the Great Recession and was part of the complex of causal events.

It was estimated in 2006 that the United States as a nation was levered at about 11 to 1 – an entire economy that had $1 of equity for every $11 of debt. When all the effects of the crisis of confidence occurred and people exited the field or were forced to – the value of assets decreased, however, the debt remained. It becomes very difficult to effect growth in an economy when people are holding large amounts of debt, and their ability acquires or appetite for more, debt is curtailed. Worse than the immediate effects of this debt, is that it weighs on economic growth for a long time. For the average person, when their house value drops and their mortgage stays the same, their ability to borrow more money and purchase goods are curtailed.

There is a phenomenon that occurs in the presence of credit; in real estate, it is common to have a 10-acre piece of land worth more per acre than a 100-acre piece of land. The reason is that when the hundred-acre piece of land is subdivided into 10 pieces there are more people who can afford the 10-acre piece of land than the 100-acre piece of land, effecting an increase in demand for the small parcel of land relative to the larger parcel – the increase in relative value between the more expensive asset and the least expensive is referred to as a “liquidity premium”. Credit in general and credit configuration has this same effect – by making assets more affordable by amortizing their cost over years you increase the pool of available buyers and exert upward pressure on all assets value. This is true also of credit configuration, by extending amortization periods you have the effect of making an asset more available – hence increasing demand and exerting upward pressure on price.

It was the extended period of well-rewarded leverage and credit availability that effected an overvaluation of stocks and related products. It was the availability of credit and credit configuration that effected massive secular inflation and the resulting bubble in the housing sector.

Discourse on the Great Recession – Trading Systems

Trading is the most primal of human exchanges, even in the most primitive societies comparative advantage prompted trading – the excellent hunter made a deal with the excellent arrowhead maker. The challenge in modern trading systems is the degree of abstraction that has evolved – there is no clear connection between actual human endeavour and trading – trading then hinges on the perception of value, rather than a perception of value anchored in relative human action. Absent a concrete attachment to a service or product, the “castle of the mind” plays a massive role; confidence or the lack of it determines value.

One of the initiating factors of the Great Recession and also the key factor in the prolonged state of uncertainty, was the inability to quantify exposure for individuals and governments due to opaque trading systems. Many of the new financial instruments were without a public forum to trade; the various assets CMO, CDO, many other Asset-Backed Securities and Credit Default Swaps without a public trading forum to make public their volume and tempo of exchange or their value, the condition of the market was indiscernible by governments and individuals – there was no ability to qualify the exposure; this effected a widespread state of unease. Lending institutions with no clear assessment of other institutions' exposure were hesitant to lend to one another regardless of the interbank rate determined by central banks or other factors – this caused serious consternation and retarded the availability of capital. Many of these “products” became valueless, even though the underlying assets had value, due to the uncertainty of the underlying asset’s value – there were no tangible means to assess value and no open trading system to manage sentiment.

When you contrast these assets’ price behaviour and ambient sentiment through the crisis with publicly traded products – stocks, exchange-traded funds and the related derivatives – one noticed a more favourable circumstance evolved with the transparent trading system. The ability to assess the value of the underlying assets due to generally accepted and regulated accounting and reporting systems and the presence of an open trading system together allowed a floor to form on the value of openly traded assets sooner than in opaque trading environments and the general market confidence in this space recovered more quickly.

Credit Default Swaps (effectively bond insurance) – for example – the sum total of the asset represent was less the total amount of “insured” value – the equivalent of a $100 asset being insured for $100,000 – default is then a favourable circumstance for the holder of swaps – the challenge of course is, the issuers of swaps often take the asset back from the entity the swap has been issued to. One can see in this circumstance how challenging it can be to assess one's exposure absent any “open” trading modality; once again negatively affecting general confidence.

There will always be “private agreements” between people and companies, however, when public entities are at play – publicly traded companies - as a matter of regulation concern public companies must be obligated to have the capacity to accurately disclose the value of assets they hold – this should preclude them from trading inside opaque systems with “products” that have no clear expression of value and no means to handle the realities of market sentiment.

Thursday, October 3, 2013

Discourse on the Great Recession – BANKING & REAL ESTATE LENDING

Credit has always presented a challenge to managing a financial system, hence the name “usury”; or perhaps look at a religion that evolved at the time of the earliest advanced banking system – Sharia and the resulting laws banning lending as a practice. Lending, coupled with fiat currency, poses a challenge to manage for modern governments as well, governments role, save in a small number of cases, is to contain over-exuberance as opposed to heightening it, as it did in the years leading up to the great recession. In tandem with government policy came the advancement of “financial sciences” and the development of derivative products to allay risk to lenders.

It is a laudable goal of the United States Government to give every citizen an opportunity to have a home. Laudable because ownership provisions stronger ties to society to a larger degree than the absence of ownership. Laudable because by provisioning the opportunity for people of limited means to build capital to own an appreciating asset they acquire the opportunity to capitalize their labour. Laudable because people of limited means with a little help can escape the rental trap. Laudable because elderly people can live more easily when they are absent a rent payment. Laudable because in broadening home ownership the government broadens all the supporting markets. The commentary post the crash in the housing market coming from talking heads was deplorable – they seemed to indicate that generalized participation in capitalism was impractical, that a goal of generalized home ownership was impractical because some were unable to manage it. You can rest assured that the people trying to claw their way to prosperity via home ownership, were in no way to blame for the real estate crash, government and industry were the culprits.

The US government brought Freddy Mac and Fanny May into being to create a circumstance that would support the banks in lending for housing to a broader segment of the population. These entities were government-initiated corporations charged with lending via banks to support a policy of generalized housing ownership in the US. While it was never the intention for the government to underwrite these organizations’ lending, when things got bad, the government did, as Wall Street suspected they would. The tacit understanding by the lending industry that government would intervene was one leg in support of aggressive lending.

The Asset Back Securities (ABS) related to mortgages grew. The underlying rationale for ABSs was to reduce risk, by pooling mortgages, and issuing bonds in accord with risk strata the banks could attract capital to the market – no single individual or institution was exposed to the full risk of any given mortgage. It was the separation of lender and borrower that contributed to “irresponsible” lending; prior to these broad-based risk mitigation tactics, the bank would lend to an individual and the bank would hold that mortgage on its books. The incentive for a bank to screen borrowers, assess the lending environment and follow through on the collection of a mortgage, that is in the sole possession of that bank, is far greater when mortgage losses fall to said bank.

Banks have a tier-one capital requirement (more or less balance sheet equity), recently elevated in the aftermath of the financial crisis. Banks need to leaver relatively small profits over large volumes of funds, so they require a method to circumvent the tier one requirements. This was achieved in some cases by a Special Investment Vehicle (SIV). A SIV is an arm’s length company that takes ownership of mortgages and often packages said mortgages in ABS. Once the mortgage is held in a SIV the bank has no exposure to that mortgage. You can see here how, the lender and/or the ABS holder, are now three or four tiers away from the borrower - worse, in many cases no one knows who the lenders are.

In the environment generated by these realities and a rapidly valuing real estate markets, “freelance” lenders were issuing mortgages that they would never have to answer for, so they adopted very aggressive tactics with complete disregard for a correction in the market or the prospect of an interest rate increase and under the premise that housing prices would always go up. When the market did correct thousands of people found themselves “upside-down”, they owed more than the value of the asset the lone was issued against – they walked away in droves – unsold inventory grew, prices dropped – in some markets, no floor was found – acres of homes have been bulldozed. The human toll was massive, the institutions that precipitated the event have enjoyed more benefit than harm and the taxpayers are paying and paying some more. So our system is less than perfect to be sure, but to paraphrase Winston Churchill, “it is awful but better than all the other options”.

Wednesday, October 2, 2013

Discourse on the great recession – Cycles

We accept cycles in nature – spring, summer, fall, winter – the predator-prey cycle, etc. People accept these cycles and they also want to preserve and protect them. Cycles are an inevitable element in the interface with the environment, the economy is an extension of the environment - ergo, the economy will have cycles – this is a good thing. The challenge arises when there is inappropriate intervention or a random circumstance that impedes a cycle's “normal” course, when this occurs the cycle becomes more extreme. Dear government, better to have ten corrections than one train wreck – the great recession has as causation both government intervention and happenstance.

Business cycle

The business cycle, depending on events, runs about seven years in duration and change is prompted by any number of factors; public sentiment, economic contraction, ancillary cycle convergence – perhaps a real estate cycle etc. Business cycles happen, there are leading indicators to warn us of their onslaught so they are, to some degree, predictable. Governments tend to associate their performance with economic performance, so the threat of a downturn in the business cycle prompts governmental counter cyclical actions. This can, at times delay, but rarely avert, a downturn in the business cycle. It is really a matter of mass, the federal government budget is about 220 billion, and the Canadian economy is possibly 10-fold that, depending on calculation and inclusions. The government’s long-term commitment to reduced red tape and an agreeable regulatory environment is the best solution to economic stability – hopefully generating a circumstance where a downturn means reduced growth rather than a contraction. Government intervention can have a short-term effect, however, often in the delaying of the cycle, the delaying makes the cycle’s path back to the eventual and certain norm more extreme than it might otherwise have been.

Real Estate Cycle – Prolonged

In the US Real Estate Market in 2006, there were a number of factors that contributed to a fervent and extended upswing, setting the scene for a more violent correction; they include foreign exchange factors that countered somewhat the US central banks actions, low general inflation due to influx of “cheaper goods” from China, the new mechanisms for distributing risk, the isolation of lending institutions from lending risk, the obscene exploitation of people pursuing the dream of home ownership by ethically devoid lenders, the tacit understanding that via Freddy Mac & Fanny May the US government was effectively underwriting mortgage risk – the aforementioned plus all the typical dynamics that contribute to a damaging escalation of real estate inventory and price. Massive secular inflation was left unaddressed by the government, in effect; a blind eye was turned to the impending housing dome. Once again, due in part to government programming and in part, to other dynamics, the cycle was lengthened and the correction was more severe.

Technological Cycle

The technology cycle runs a similar pattern as the typical product cycle. There is the period of innovation, gradual absorption of the technology into society at large, then a steep curve as the technology gains critical mass and lastly the plateau and decline or end due to disruption. As technology enters the “critical mass” stage and begins to be rapidly accepted, it generates a vortex which draws in users and providers at a rapid pace, once the plateau is reached there is often an overrun of suppliers, additionally, there is large scale redundancy generated due to the new technology’s efficiency, as well as, the casualties of the incumbent technologies. At the close of the technology cycle, absent a replacement, inevitably there is a downturn. We have just passed through the maturing of the “the computer technology cycle” and as when the “rail” technology cycle ended, we are experiencing all the negative effects that emanate from a technology cycle ends. The mobile market or the other “adjuncts” to the computer cycle are essentially drawing on plateau resources to access the market – no real “new blood” of sufficient mass to effect a unique cycle.

Macro-economic cycle

There are macro-economic cycles running 60 to 80 years in duration, the contraction is normally effected by the ending of a technology cycle or demographics - their existence has an inherent reality of the ebb and flow of large civilizations, these cycles are apparent in various duration throughout history. The last one contracted in the late 1920s and we are nearing the end of a similar one now.

Conclusion

There has been a confluence of cycles in the contraction phase; the “crisis of confidence” that precipitated the beginning of the great recession was really a collective realization that due to a number of factors the music was about to stop – at that point even the rats jumped ship. The good news about a cycle is that inherent in a downswing, there is an upswing – it’s never a question of if, but rather when.

Monday, September 30, 2013

Discourse on the great recession

If a collection of people were to begin a conversation with the following, “we are going to make society wholly dependent on a collection of abstractions”; it is a certainty that it would draw a skeptical response. It is the case, however, that our society is wholly dependent on a collection of abstractions – abstract representations of the human endeavour. The first tier of which is fiat currency, since Brentonwoods – a meeting of financiers – the entire world has been dependent on debased currency, with the greatest dependence on the US$ as the world reserve currency.

If one contemplates trade absent currency of any kind, one arrives at a barter society – the exchange between individuals of goods and services; the public sentiment or the “castle of the mind” can wreak no havoc in the barter society because there is no opportunity for the migration of value beyond barter, so the actions of people immediately proximal are the sole determinant of the volume of trade or the “Domestic Product”. There are no bubbles to burst, there is no means to create them. The barter society of course is very limiting, precisely because there is no opportunity for the migration or accumulation of value beyond immediate barter, nor is there any real means to remunerate an offering of greater value with greater reward. The barter society offers stability the cost is stasis.

It becomes necessary to mobilize value and to accumulate value to facilitate the human endeavour, in the face of this reality people seek compact and readily transferable sources of value, gold for example. The most cogent example of currency is the clay tablets used in early society to represent a share of a collective grain holding, people would take the tablet to the central granary to retrieve a portion of their share of the stored grain. At times people would circumvent the granary and trade the tablet for a good or service – the tablet was a currency based on grain – an abstract representation of a given person’s grain holding or share. It is easy to see the effect of making more clay tablets, the tablet's value relative to the grain would diminish. With gold-based currency the only opportunity for a “devalued” currency is to find more gold, a phenomenon that happened in the mid-1800s when there were large discoveries of gold and the resulting gold inflations.

The currencies we all rely on now have no base, money is created now at the swipe of a credit card, there is no limitation on the amount of money that can be created or the rate it can be created, fiat currency is only functional due to the belief of value – here the “castle of the mind” can wreak havoc. When a collective optimism exists – people begin to buy more, so more currency is created, as currency is created it spurs demand, and it then takes more dollars to purchase a given good or service – both because people are demanding more and because there is no limit on the dollars to be had – this fuels an inflationary feedback loop where optimism reaffirms optimism in the collective “castle of the mind”. Of course, optimism always runs its course, and when the collective “castle of the mind” contracts much of the money previously created is unsupported as values contract, as values contract pessimism grows and the feedback loop is now in the opposite direction. It is the mix of the first tier of abstraction – fiat currency – and the second tier of abstraction, the ability to readily contract credit, which fuels the currency cycle that often has a massive effect on the economy at large.

To put boundaries on this phenomenon one either has to limit money or its availability – we have in large measure chosen to limit availability; this is achieved by central bankers exercising judgment on the level of the interest rate on money lent from the central bank to banks and the interest rate of money lent between banks.

The challenge has been that the complexity of any given economy precludes the ability to intervene at an appropriate time to prevent damaging outcomes of the cycle and this reality is exacerbated by foreign exchange of money and other global influences. Regardless of any given domestic interest rate, money can be borrowed in another jurisdiction for an attractive rate.

Central banks look at the forest in assessing when to raise or lower interest rates; secular inflation has little play in the decision process. It was the housing sector in the US which was running an inflation rate in excess of 20% in some cases and all the resultant lending complex that started the crisis of confidence. The US Central back had a low rate of inflation indicated by low percent growth in the Consumer Price Index (CPI), a CPI that was suppressed by a long and sustained influx of “cheap goods” provisioned by the escalation in the Chinese manufacturing capacity. This coupled with the Japanese government’s near-zero interest rate in the face of a lagging economy and the resulting yen foreign exchange (yen carry trade) muffling the effect of any US rate increases resulted in a ready stream of credit to fuel the housing sector. This was further exacerbated by tacit understanding that via Freddy Mac and Fanny May the US government was in effect underwriting the credit binge in the housing sector.

It is important to stop here to contemplate the key point of discourse, in observing the first tier of abstraction, fiat currency – one can see from the above discourse that just a single tier of abstraction fuels violent cyclicality, and one can see the complexity in managing and understanding the effects of actions taken in the realm of just currency. Our financial system is a complex of several tiers of abstraction, and with each tier of abstraction comes, to varying degree, instability. In the financial world, the increasing tiers of abstraction are referred to as “financial deepening”. In 1985 the abstract representation of the economy had a value about on par with the “real economy”, by 2006 the abstract representations of the economy had increased dramatically – some estimated up to 365 times the “real economy”. Of course, it was impossible to know due to opaque trading systems and the nature of the financial instruments themselves.

A complete discussion relating to the various financial instruments and the individual effects on the whole issue is beyond the scope of this introductory document, the point here is that abstraction, especially layered abstraction is a source of instability. Abstraction is a product of the human mind and they grow and contract with all the volatility one would expect of a mob out to grab what they can and then to get out of the market to stop from losing what they have. I make this assertion with comfort, as John Kenneth Galbraith made the same one in his book on the cause of the great depression. The inclination to create an ever more complex and layered financial complex is growing; we need to be mindful of the outcomes that ensue. Further comment will offer support for some optimism however, optimism lies in the communications capacity of humanity and the push for transparency in trading systems.

Click Below

For Discourse on Specific Causal Elements