Wednesday, March 20, 2013

UK Economics vs US Economics

When I was working in the stockbroking industry a long long time ago, I could not help but be blown by the sharp contrast between a UK fund manager and an American fund manager.

When I started out, we were doing with good old British traditional macroeconomics. We asked questions like: Where does the GDP growth come from in real terms? Is it investment driven (quantity) or is it really from productivity growth? Are you sure that it is not money sloshing around playing havoc on values that we are mistaking nominal value for real value? Is the money supply growth too much? Is the money supply growth coming from the system itself such as by an increase in the speed of lending, and that it is not coming from central bank - worse still, the central bank buying the debts of banks!? The central bank was even furiously trying to stabilise the money supply by buying foreign money inflow - in a process called sterilisation. I think this phrase has not been used since. Are there product innovations and is the market strong? etc.

At some point, we felt that the economy was really doing well beyond its capacity to absorb the amount of cash that everyone was throwing into the stock market. So, we got our clients to bail out. British clients. What saved the stock market for the day were the new American clients.They were very fresh. They just had one simple rule of thumb to go by - the real interest rate. If the real interest is positive - if the nominal interest rate is higher than the inflation rate - then the situation is considered not inflationary. There was then much game being played with the concept of the core inflation rate - you'd got to take out the "insignificant" elements like food prices because they did not impact the production of goods and services, etc. Much capital was made out of these little mental games, so long as there was money pouring into the market. Of course, until some smart person shouted "Fire!" and everyone rushed to exit through that one small door and, of course, the devil was there waiting to shut the door. The devil was playing with fire; "if I get burnt, so should you too!"

So, it amazes me how on earth can the world live with the idea that it is okay to the real interest rate is now negative as the nominal interest rate is near zero (for the saver) and inflation is far higher than that thanks to China. Of course, there will always be the market operators who will happily tell you all kinds of stories everyday just to make you feel looked after because you have all this money and are bored. I worked with this colleague who was a senior (one of the bosses) and a dealer. I heard him said to his client: "The stock looks good. There is inflation everywhere and prices are going up and this will be very good for the P/E. Buy." I didn't think he was even an economist.

So, to all of you out there trying to earn a living selling stocks, or out of a job and punting stocks just to feed your family, I wish you all the best. You are doing what I have given up. You are brave. This blog not just this post, in fact, is just a little help I am trying to give to people like you who are caught in the deep end of things. This is a side view which I have the luxury to paddle, to alert you to other things which you may have overlooked in your haste. I think the limits to foolish is define by the extent of one's greed.


walla said...

A big project is announced. There's no cost-benefit analysis. Analyses on other similar projects elsewhere put paid to the viability of the project. It will load stress onto public finance well into the future which in turn adds problems propagating the present situation.

Clearly the process is untenable. But the vision is painted enervating however in one dimension only. And that's why the company who out of the blue gets a big chunk of it after the announcement is made suddenly sees its share price go almost limit up.

This adds a new slant to private equity market which because it is private it doesn't add to the store of market information needed to level the playing field needed to prop up some grand theory on the market whose pyramidal shape has an impervious wall at the top separating the few big influencers from the mass thousands of punters at the base.

But the problem doesn't stop there. To maximise gains and/or minimize losses from a basket of shares held or sold, the big players couple their share plays to forex plays, thus influencing the cost of things, the value of savings, and the shape of trade as well.

Central banks then come in momentarily and monetarily but only to compound market calculus which in turn enables fixed income and sell-side as well as buy-side researchers to have more to write until today you can read some ten million analyst reports on all the shares and market economies in the world including those from some of the big name houses which have since been swallowed up by others which however continue to do the same old thing of making more for themselves over and above their clueless clients.

But that's just one frame of reference. Inasmuch one can ask whether a moving stream is the same or different for the water that courses its path at any instantaneous moment.

If we move to another frame of reference, we may find ourselves back to basics. The stock market has been the primary wealth creator and growth generator in the past for it is seen as a prestigious way to gather investment capital what more make additional gains by collateralizing the valuations, and spreading or distributing some wealth in the process.

However that may also be another mirage for if money is to be concentrated at one point, it has to be moved from another or other points based on certain but changing assessments regarding the fertility of each point for value enhancements.

To keep all these beliefs going, some postulate that a market exhibits inherent cyclical behavior which implies its players in the present apply basic motivations no different from those applied by players of earlier eras, notwithstanding changes to the environments in which the markets have had to operate.

It then becomes a scheme generally adopted by all who however are motivated to find or create changes for unless there are changes money won't be made by the wisdom or madness of crowds.

So that the success factor mandates a contrary belief in what contributes to success.

walla said...

There are other motivations. Some people like to solve puzzles. They thrive on breaking enigma codes, finding patterns, savoring the white-heat moment of an intense discovery that pumps up the adrenalin in what would otherwise be dry humdrum indeterminate and sedate lives. To continue doing so, they however have to believe in the repeatability of their endeavours which implies non-changeability which therefore contradicts their belief that change must happen in order to make money.

Which leads one to conclude that the other reasons people play the stock market must be because real innovation and progress in economies don't come that easy. It takes years of laborious grinding criss-crossing work chasing dreams and mirages up blind alleys to hit on one discovery that can be commercialized explosively to such an extent the market will valuate the share generously.

Meanwhile one must feed the family and add whatever little savings that can be mustered later for the certain eventuality of another example of the law of thermodynamics, namely, to change add chaos as also a constant these days.

With so much crossfire going around, one can therefore be compassionate how those who blame China for inflation today can laconically ignore how she had held inflation at bay throughout the world for thirty years, again at another expense to her own peoples and industries.

However don't read too much into my comments even if they seem to be the only ones around here. After all, i have never bought a single share in my life.

economic stability said...

I'm also one of the person who gave up on this. I just wish all the best for those people who are still working in stocks and hopefully, they can earn well.