My dear friend challenged me today; she warned me that she believed in the overall 'basics of business' - essentially that she believes that the markets respond to specific company performance. Performance is based on consumers, who will only spend their dough if they believe in the company/like the products and/or services offered. Therefore, the consumers drive the performance, and in turn the performance drives the market. This is in comparison to high-finance/bankers in 3-piece suits driving the stock market.
Now this was a warning directed at me, because I previously mentioned that the markets are going haywire and are not responding to fundamentals at all. The difference is that I am not arguing that high-finance and bankers are driving the markets, but neither are fundamentals.
Instead of the 3-piece suits driving the wagon, we have a macro picture whom is our courteous (yet very unsafe, speeding, and wreckless) driver. This driver is not merely in a 3-piece suit, but is a mixed breed of only the finest 3-piece suit, political agendas, and cultural woes (a third of each, I envision). Not fundamentals, not suits, but rather every whisper/rumor/telepathic thought from Europe. And after all, what fun is a blog if no one agrees/disagrees/thinks you're foolish?
If you can enlarge the chart above, which was created by Bloomberg on October 19, 2011, it shows that the beta between the S&P 500 and the euro was +0.74. If I can bring you back to 2nd year finance (for those who care for a throwback), beta is a calculation of correlation. A correlation coefficient of +1 means that the two values (in this case the euro and the S&P 500) would move in lockstep, where as a correlation coefficient of -1, would mean that the two values would move in precisely the opposite direction.
A reading of +0.74 is the highest reading since the euro was introduced in 1999. What does this mean? Investors flock to perceived safe havens and out of riskier assets ('flight to quality') when they see inclining risk. The euro has been extremely volatile, as rumors of collapse of the eurozone and the euro as a currency all together have pushed investors to pull out of the euro currency and into USD/treasuries/other 'safe haven assets'. The downward pressure on the euro has been immense, and the US stock market has followed, despite decent economic data echoing throughout the last few months in the US.
I do believe that if the market was responding to company fundamentals, then we wouldn't be in such a volatile market, where even the savviest traders are having a hard time - unless you can predict the news coming out of Europe, you can't predict the market. Hedge funds are on track to post their second worst year on record - aren't these the smart guys? Maybe smart, just not psychic.
The VIX is an index of volatility that gauges three-month historic volatility. On October 31, the VIX was at a record 191.59 vs. a mean of 92.56 over the past decade. December 2008 was the prior peak at 190.44. On August 8, 2011 we saw the US stripped of its highest credit rating, which sent the markets plummeting. Since then, the months following have made for a market that is crafted for only those with steel stomachs. A 2% increase in the entire index, followed by a 2% decrease, CDS sovereigns and bond yields all increasing/decreasing by values that would have been witnessed over an entire year materializing in a day/or within days!
Although, I believe that my dear friend is correct in theory, unfortunately the way things should be and the way things are do not have a beta of +1 (extra bonus for fitting in a beta joke). Comments?? :D
Suffice to say theory rarely happens in the real world. The global economy quite frankly resembles a massive game of dominoes. But where did it all start? We can all see/read/hear about the major ramifications in Europe but how in the world did it it get this far?
ReplyDeletePoliticians do what they do best, point fingers, holler at one another and try to shift the blame. Let's be real here mr.presidents... wtf do you really know?! According to our textbooks, the government is suppose to step in and make things all better... SUPPOSE TO right? Now I'm going to ask the following question: How much money do politicians make- salary wise? (rhetorical.. work with me for now) Nowhere near as much as the smart folks that run our economy... next question, how many politicians are squeaky clean and bribeless? (again rhetorical...frig, even in a conservative nation like Canada we've got drama up in parliament). By default these law-makers are in no condition to be making decisions with the public's best interest at heart. Who would fund their next election? Who would pay for their nice little trips around the world?
Now, let's think really hard here... the smartest people in the world who are capable of making smart sound decisions happen to sit in offices overlooking Manhatten not in Congress. And that is why they're smart...they know that they can make more money in the private sector and influence it so much so that going into the public sector would be..to say it delicately... the opportunity cost would be in the hundreds of millions. Literally.
To be fair, goldman sachs happens to pump out politicians, but Goldman sachs has always had a group of speshal kidz.
Moving on, I will admit, Lauren is quite well-versed in the happenings of the economy and makes very valid points. I do agree that what should happen in theory is not happening, but then again, when was the last time any theory in school made sense?
I'm currently still trying to mind-map all that's imploded in the world these past few years. Is it fair to blame consumers for spending money they never had? Or do you blame the banks who lent them all the credit to live so vicariously? Is it really fair to blame the bankers and traders who just did what anyone else with more knowledge would do... sell a product they knew was worth nada? OR is it fair to blame the guys who started the 'lets trade bad debt' game instead... Sometimes I wonder if the bankers/traders even knewww what they were trading and if they genuinely believed that they had great products since that's what they were taught. That belief coupled with excellent sales acumen, these guys could probably sell poop in a diaper, and that is exactly what they did to the rest of the world. Seriously, it's no ones fault that the US banks are that good at their jobs. In fact, once you sign up to work for a company, it's your duty to make them as much money as possible, because let's face it.. if you don't someone else will. That dangerous train of thought is what I believe spiraled this whole system out of control. Basic human pride and greed.
I have much more jamming around in my brain but everytime I try to type it up, it gets a bit messy.. I'll have to think of a more clear-cut way to deliver my thoughts but that's just a wee bit up there now... if it makes no sense.. ti's not really suppose to since most of these discussions i've only ever had with a few friends and professors a year ago or so...
feel free to banter back. criticism is welcomed!
Thank you for your comments. I feel like the angry guy in the video below would sign a big Hallelujah!
ReplyDeleteIt’s definitely a big “what the eff?!!?” when we think about how we got here, and how it got this far. For example, Greece always kept a budget but never managed to ever clock the actual numbers (for you non-accountants – if your actual spending is greater than your actual revenues, then you have a deficit! What a concept! Who knew you couldn’t use fake numbers!?). Greece’s public railroad was paying out FOUR TIMES its revenues in salaries. No wonder they were consistently reporting losses. The average wage of a worker in this company was 65,000 euros a year! Everyone’s happy as long as the gravy train is still moving. It was like being a board of director before the wave of corporate social responsibility and corporate governance reform (“What do you mean that this diamond encrusted top hat for my wife isn’t a corporate expense?!”). Life is good, and no one had incentive to push for change as long as the pay check was b-lining straight into their pockets. Titles such as “prime minister” or “finance minister” were prestige, as seen by former Italian PM Berlusconi – more of a status symbol than a role... well a role that you actually had to do work in!
I go back and forth on the ethics of business... I do think that there are lines. For example – Citigroup betting against its own products it sold to clients. WRONG. I think that there are more problems than just the bankers creating products too complicated for anyone to understand (umm, why was it again that S&P/Moody’s didn’t rate the mortgage back securities appropriately?!). Jon Corzine betting a whopping $6.3B on European sovereigns – WRONG. There desperately needs to be reform in a system where individuals have incentive to wage huge bets with other people’s money. In the case of MF Global, Corzine goes the full 9 yards by not only making a ridiculous bet, but by ‘misplacing’ $1.2B of client posted collateral in the process. Let me put this into perspective – the bet on European sovereigns was FIVE TIMES the company’s net worth. The leverage ratio at the fall was approaching 40:1.
Until there is less of an upside for people to ‘go big’, after all they can only lose their base capital if it all goes to shit, but if the big bet works out – it’s raining men (men = tons and tons of cash). The crazy thing is that even if we mend this mess in the US, we really have a global issue. We need to see more of an integrated approach to solving the global debt crisis. How is this possible though, when politics/self serving interests impede basically everything?! (Queue more riots/protests).