In a show of how some disagree with the price, many are noticing the prices of CDSs. Consider the Guardians story, Calls to curb CDS gamblers as Greek crisis continues (http://www.guardian.co.uk/business/2010/feb/15/credit-default-swaps-regulation).
I agree that illiquid markets do not render accurate market data all the time but is it possible the odds of default are greater than most believe? If hedge funds are over-paying for CDSs, don't you think Goldman or JP Morgan would offer them as many as they want?
I do agree that this crap should be regulated. As a clearing member at a futures exchange, I can only think of one legitimate reason it isn't: those making all the money set the rules. It's similar to corporate bond trading before the TRACE was put in place. Markets with informational disadvantages assure those in the know will pick off someone on the other side for a tidy profit. It's time regulators clean this up.
Monday, February 15, 2010
Wednesday, February 10, 2010
As we get started, it's necessary to recognize where we are on the chess board. There are many issues vying for our attention each day and it's important to narrow them down to something manageable. We want to create a conceptual understanding of the topic that can slowly be managed over time. A change in perspective should come from a cumulative change in market data or news flow. I try to manage my understanding of a topic cumulatively, without letting one piece of data scare me out of the pocket. Decisions are made at the margin however, once cumulative imbalances are enough to change your judgment of the environment. That said, below is a list of investment themes that should be researched each day.
1. Debt. The debt problem has evolved from a household issue into a sovereign issue. As governments around the world stepped up spending to avoid the next Great Depression, they have accumulated more debt in the face of declining tax receipts. This is evolving at a fast pace with Greece at the forefront of any news report. How the EU deals with the Greeks could set the tone for how/when the debt problem will manifest. This war is also waging in State finances but fortunately, the spotlight is elsewhere.
2. Public Servants/Unions. The compensation and benefits of public servants and unions is out of line with the private work force. Budgets will have to be tempered to make ends meet. Some will bargain. Some will not. http://www.projo.com/education/content/central_falls_teachers.1_02-13-10_A8HEI7Q_v61.3a65218.html.
3. Unemployment. There is not a clear driver for jobs outside of government work. Even as the economy stops hemorrhaging jobs, an increase of 150,000 a month is necessary to reduce unemployment (all other things equal).
4. Emerging market growth story. China is racing after Japan to be the second biggest economy in the world. Even with 10.7% GDP growth in Q4 and 8.7% for all of 2009, China has problems of its own. It has recently raised reserve requirements and interest rates and clamped down on lending to prevent its economy from overheating. If China downshifts, the repercussions will be felt from Australia to the US as many are looking for emerging markets to pull the US out of recession.
5. Politicization of markets/market participants. The finance industry will stay under pressure as society places blame. Talking heads will disagree with the price to serve their ideological bias. Those successful in the markets will be viewed as taking advantage of others. Providing liquidity will no longer be viewed as a benefit to society.
That's a good starting point to define the major issues confronting the market and the economy. I'm sure other issues will come to the forefront as some slip away. We will change our judgments accordingly.....and slowly.
1. Debt. The debt problem has evolved from a household issue into a sovereign issue. As governments around the world stepped up spending to avoid the next Great Depression, they have accumulated more debt in the face of declining tax receipts. This is evolving at a fast pace with Greece at the forefront of any news report. How the EU deals with the Greeks could set the tone for how/when the debt problem will manifest. This war is also waging in State finances but fortunately, the spotlight is elsewhere.
2. Public Servants/Unions. The compensation and benefits of public servants and unions is out of line with the private work force. Budgets will have to be tempered to make ends meet. Some will bargain. Some will not. http://www.projo.com/education/content/central_falls_teachers.1_02-13-10_A8HEI7Q_v61.3a65218.html.
3. Unemployment. There is not a clear driver for jobs outside of government work. Even as the economy stops hemorrhaging jobs, an increase of 150,000 a month is necessary to reduce unemployment (all other things equal).
4. Emerging market growth story. China is racing after Japan to be the second biggest economy in the world. Even with 10.7% GDP growth in Q4 and 8.7% for all of 2009, China has problems of its own. It has recently raised reserve requirements and interest rates and clamped down on lending to prevent its economy from overheating. If China downshifts, the repercussions will be felt from Australia to the US as many are looking for emerging markets to pull the US out of recession.
5. Politicization of markets/market participants. The finance industry will stay under pressure as society places blame. Talking heads will disagree with the price to serve their ideological bias. Those successful in the markets will be viewed as taking advantage of others. Providing liquidity will no longer be viewed as a benefit to society.
That's a good starting point to define the major issues confronting the market and the economy. I'm sure other issues will come to the forefront as some slip away. We will change our judgments accordingly.....and slowly.
Friday, February 5, 2010
In the beginning...
“In the beginning was the Market, and the Market was with People, and the Market was People. People were in the Market in the beginning.” Trading 1:1
That sums it up. The market is only the collective consciousness of society. It is always telling a tale whether or not you agree with the price. Ben Graham once said the market in the short term is a voting machine but in the long term it’s a weighing machine. The market never lies over the long term. In the short term, it's almost always being pushed and pulled by different forces whether they be the psychological blind spots of market participants or an intervening hand. The goal of this blog is to be aware of those different forces over varying time horizons. We will rise above the chess board and study the implications of political and market news on different asset classes from commodities and currencies to stocks and bonds. Let the games begin.
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