Pir Sahib on Wall Street (Part –1)

Gold and Economic Freedom

By ALAN GREENSPAN

An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense-perhaps more clearly and subtly than many consistent defenders of laissez-faire-that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.

In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.

Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.

The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.

What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible.

More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term ``luxury good`` implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.

In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value, will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.

Whether the single medium is gold, silver, sea shells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has always been considered a luxury good. It is durable, portable, homogeneous, divisible, and, therefore, has significant advantages over all other media of exchange. Since the beginning of Would War I, it has been virtually the sole international standard of exchange.

If all goods and services were to be paid for in gold, large payments would be difficult to execute, and this would tend to limit the extent of a society`s division of labor and specialization. Thus a logical extension of the creation of a medium of exchange, is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.

A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security for his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.

When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy`s stability and balanced growth.

When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one--so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the ``easy money`` country, inducing tighter credit standards and a return to competitively higher interest rates again.

A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold, and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post- World War I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.

But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline- argued economic interventionists-why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely--it was claimed--there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks (paper reserves) could serve as legal tender to pay depositors.

When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve`s attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain`s gold loss and avoid the political embarrassment of having to raise interest rates.

The ``Fed`` succeeded: it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930`s.

With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain`s abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed ``a mixed gold standard``; yet it is gold that took the blame.)

But the opposition to the gold standard in any form-from a growing number of welfare-state advocates-was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

Under a gold standard, the amount of credit that an economy can support is determined by the economy`s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government`s promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited.

The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which-through a complex series of steps-the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets.

The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy`s books are finally balanced, one finds that loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists` tirades against gold. Deficit spending is simply a scheme for the ``hidden`` confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists` antagonism toward the gold standard.


(As reprinted from the book ``Capitalism, the Unknown Ideal``
by Ayn Rand with additional articles by Alan Greenspan - 1967

Following is a verbatim article as it was published in the Wall Street Journal ... back before he was the Fed chairman ... (more below)




CAN THE U.S. RETURN TO A GOLD STANDARD?


By Alan Greenspan


The growing disillusionment with politically controlled monetary policies has produced an increasing number of advocates for a return to the GOLD STANDARD - including at times president Reagan.

In years past a desire to return to a monetary system based on gold was perceived as nostalgia for an era when times were simpler, problems less complex and the world not threatened with nuclear annihilation. But after a decade of destabilizing inflation and economic stagnation, the restoration of a GOLD STANDARD has become an issue that is clearly rising on the economic policy agenda. A commission to study the issue, with strong support from President Reagan, is in place.

The increasingly numerous proponents of a GOLD STANDARD persuasively argue that budget deficits and large federal borrowings would be difficult to finance under such a standard. Heavy claims against paper dollars cause few technical problems, for the Treasury can legally borrow as many dollars as Congress authorizes.

But with unlimited dollar conversion into gold, the ability to issue dollar claims would be severely limited. Obviously if you cannot finance federal deficits, you cannot create them. Either taxes would then have to be raised and expenditures lowered. The restrictions of gold convertibility would therefore profoundly alter the politics of fiscal policy that have prevailed for half a century.


Disturbed by Alternatives

Even some of those who conclude a return to gold is infeasible remain deeply disturbed by the current alternatives. For example, William Fellner of the American Enterprise Institute in a forthcoming publication remarks ``...I find it difficult not to be greatly impressed by the very large damage done to the economies of the industrialized world... by the monetary management that has followed the era of (gold) convertibility... It has placed the Western economies in acute danger.``

Yet even those of us who are attracted to the prospect of gold convertibility are confronted with a seemingly impossible obstacle: the latest claims to gold represented by the huge world overhang of fiat currency, many dollars.

The immediate problem of restoring a GOLD STANDARD is fixing a gold price that is consistent with market forces. Obviously if the offering price by the Treasury is too low, or subsequently proves to be too low, heavy demand at the offering price could quickly deplete the total U.S. government stock of gold, as well as any gold borrowed to thwart the assault. At that point, with no additional gold available, the U.S. would be off the GOLD STANDARD and likely to remain off for decades.

Alternatively, if the gold price is initially set too high, or subsequently becomes too high, the Treasury would be inundated with gold offerings. The payments the gold drawn on the Treasury`s account at the Federal Reserve would add substantially to commercial bank reserves and probably act, at least temporarily, to expand the money supply with all the inflationary implications thereof.

Monetary offsets to neutralize or ``earmark`` gold are, of course, possible in the short run. But as the West Germany authorities soon learned from their past endeavors to support the dollar, there are limits to monetary countermeasures.

The only seeming solution is for the U.S. to create a fiscal and monetary environment which in effect makes the dollar as good as gold, i.e., stabilizes the general price level and by inference the dollar price of gold bullion itself. Then a modest reserve of bullion could reduce the narrow gold price fluctuations effectively to zero, allowing any changes in gold supply and demand to be absorbed in fluctuations in the Treasury`s inventory.

What the above suggests is that a necessary condition of returning to a GOLD STANDARD is the financial environment which the GOLD STANDARD itself is presumed to create. But, if we restored financial stability, what purpose is then served by return to a GOLD STANDARD?

Certainly a gold-based monetary system will necessarily prevent fiscal imprudence, as 20th Century history clearly demonstrates. Nonetheless, once achieved, the discipline of the GOLD STANDARD would surely reinforce anti-inflation policies, and make it far more difficult to resume financial profligacy. The redemption of dollars for gold in response to excess federal government-induced credit creation would be a strong political signal. Even after inflation is brought under control the extraordinary political sensitivity to inflation will remain.

Concrete actions to install a GOLD STANDARD are premature. Nonetheless, there are certain preparatory policy actions that could test the eventual feasibility of returning to a GOLD STANDARD, that would have positive short-term anti-inflation benefits and little cost if they fail.

The major roadblock to restoring the GOLD STANDARD is the problem of re-entry. With the vast quantity of dollars worldwide laying claims to the U.S. Treasury`s 264 million ounces of gold, an overnight transition to gold convertibility would create a major discontinuity for the U.S. financial system. But there is no need for the whole block of current dollar obligations to become an immediate claim.

Convertibility can be instituted gradually by, in effect, creating a dual currency with a limited issue of dollars convertible into gold. Initially they could be deferred claims to gold, for example, five-year Treasury Notes with interest and principal payable in grams or ounces of gold.

With the passage of time and several issues of these notes we would have a series of ``new monies`` in terms of gold and eventually, demand claims on gold. The degree of success of restoring long-term fiscal confidence will show up clearly in the yield spreads between gold and fiat dollar obligations of the same maturities. Full convertibility would require that the yield spread for all maturities virtually disappear. If they do not, convertibility will be very difficult, probably impossible, to implement.

A second advantage of gold notes is that they are likely to reduce current budget deficits. Treasury gold notes in today`s markets could be sold at interest rates at approximately 2% or less. In fact from today`s markets one can construct the equivalent of a 22-month gold note yielding 1%, by arbitraging regular Treasury note yields for June 1983 maturities (17%) and the forward delivery premiums of gold (16% annual rate) inferred from June 1983 futures contracts. Presumably five-year note issues would reflect a similar relationship.


A Risk of Exchange Loss

The exchange risk of the Treasury gold notes, of course, is the same as that associated with our foreign currency Treasury note series. The U.S. Treasury has, over the years, sold significant quantities of both German mark - and Swiss franc denominated issues, and both made and lost money in terms of dollars as exchange rates have fluctuated. And indeed there is a risk of exchange rate loss with gold notes.

However, unless the price of gold doubles over a five-year period (16% compounded annually), interest payments on the gold notes in terms of dollars will be less than conventional financing requires. The run-up to $875 per ounce in early 1980 was surely an aberration, reflecting certain circumstances in the Middle East which are unlikely to be repeated in the near future. Hence, anything close to doubling of gold prices in the next five years appears improbable. On the other hand, if gold prices remain stable or rise moderately, the savings could be large: Each $10 billion in equivalent gold notes outstanding would, under stable gold prices, save $1.5 billion per year in interest outlays.

A possible further side benefit of the existence of gold notes is that they could set a standard in terms of prices and interest rates that could put additional political pressure on the administration and Congress to move expeditiously toward non-inflationary policies. Gold notes could be a case of reversing Gresham`s Law. Good money would drive out bad.

Those who advocate a return to a GOLD STANDARD should be aware that returning our monetary system to gold convertibility is no mere technical, financial restructuring. It is a basic change in our economic processes. However, considering where the policies of the last 50 years have eventually led us, perhaps there are lessons to be learned from our more distant GOLD STANDARD past.


( The above appeared in print on September 1, 1981. Its author, Alan Greenspan, was then a partner in Townsend-Greenspan & Co. - an economic consulting firm. It is relevant and very significant to also know that Greenspan was the Chairman of the Council of Economic Advisors from 1974 to 1977, a period witnessing dramatic changes in the price of gold.)

#61 by SR on November 23, 2002 Re: Zeemax Notional value of derivatives

[Let`s all repeat that number so it sinks in: $128 Trillion]

Yes the growth of derivatives has been as follows:

1994: $50.94 Trillion
1998: $ 83.23 Trillion
1999: $ 90.99 Trillion
2000: $ 97.90 Trillion
2001: $ 121.74 Trillion

As of Semptember 2002 it may well be $128 Trillion. I can believe that. There`s a big jump from 2000 onwards.

As from above, it`s obvious there`s a major trend towards leveraged financial instruments. $ Libor is at 1.48% p.a. so where does one go to get a return ? The most popular instruments in the Arab Capital Market now are inverse/reverse floaters and ridiculous stuff like that. Thus the growth in derivatives. It`s total madness.

Yes I agree. The bubble will burst. I also agree risk cannot be eliminated, only distributed. When the bubble bursts, only the people holding intrinsic value will survive.

Rgds

Re: Zeemax Notional value of derivatives

Good to see your post. My figuers were old when I quoted the $72 Trillion figuer. The situation today, in fact, has gone far worse then even I had imagined. Your figuer is also a bit old. The latest figuer that I`ve seen (as of September 2002) is a wapping $128 Trillion.

Let`s all repeat that number so it sinks in: $128 Trillion

Derivatives trading outside exchanges grew 15 percent to a record $128 trillion in the first half of the year, driven by contracts pegged to interest rates, the Bank for International Settlements said earlier this month. The market is more than four times global gross domestic product as measured by the World Bank.


[Derivatives] have become ``central`` to global growth because they make it easier to take risks, Greenspan recently told the Council on Foreign Relations.

At the same time, derivatives` reliance on leverage creates the ``remote`` possibility of a chain reaction of failure, ``a cascading sequence of defaults that will culminate in financial implosion if it proceeds unchecked,`` Greenspan said.

Fed feared that could happen following the September 1998 collapse of Long Term Capital Management, in 1998, when the world economic picture was far healthier than it is today. I don`t think the possibility of a disaster is all that ``remote`` as officals claim. A cursory glance at the financial history of just the recent decade shows so many of these ``remotely possible`` events that one begins to wonder if they are really ``remote`` or if their mathametical models are flawed. Let`s see: Asian currency crisis, Russian collapse, LTMC, Mexican peso, Turkish Lira, Argentina, ... knock, knock,... hello? Any body home???

No, they`ve all gone to the casino to spend their worthless paper money to buy even more wothless paper, called ``shares`` of Novellus, eBay, Qualcom, etc, etc, at ``low`` (nod, nod, wink, wink), reeeeally low bargain prices.

...SR

Re: #58 by wm [``... I believe that a decently run small business beats any mutual fund any day of the week. If you want return on investment you gotta work at it and raise it yourself, no one else is going to do it for you and don`t be taken in by the `fake` market and don`t be suckered into coke snorting armani wearing crooks ...``]

There is no question about it on average.

However, if you were to go about two standard diviations off, the picture changes.

I`m glad you`ve particularly singled out `mutual funds` because that is the true average.

Most people do not get rich, only few do. It therefore follows that doing what most people do is a sure way of staying right at or around the mean. Most people (of those who think of themselves as investors) `invest` in mutual funds. Its a no-brainer, and that`s the reason why most people do it.

...SR

#51 by sac on November 15, re tahmed32 #50:

[SR may have been (un)knowingly disingenous about the $72 trillion derivatives figure. ]

Let me make a correction here. The derivatives outstanding at end 2001 were as follows:

Over-the Counter (OTC) Foreign Exchange + Interest Rate + Credit + Commodity + Equity-Linked + Debt-Linked + Exchange-Traded Derivatives : $ 121.74 Trillion.

(Source: Bank of International Settlements, British Bankers Association)

Rgds

RE: SR

My two cents, I don`t have time for the commodities yet, and I have held my simple and naive view that Wall Street is a rigged market for quite some time now, so I don`t sweat the ticker, I believe that a decently run small business beats any mutual fund any day of the week. If you want return on investment you gotta work at it and raise it yourself, no one else is going to do it for you and don`t be taken in by the `fake` market and don`t be suckered into coke snorting armani wearing crooks at the street. Someone recalled a funny story, the ticker would jump points while the sleaze ball ``analyst`` had commented how good a company it was, not revealing the fine print that they were on its payroll and now they talk about laterling...isn`t that a shocker...;-)

Re: #56 by Pardesi [“… there are so many contributing variables, some … manipulated by governments and others not, that it makes it very hard … to determine this probability with any certainty. Therefore, … medicine … would be proportional to one’s own judgement…

Are you going to discuss this in your next article? …”]

Thank you for your input. I completely agree with you. It is only the differences in opinions that make up a market. If we all agreed on everything, no one would buy or sell anything, and I would be without an occupation.

The coming pieces under the Chowk FOMC column should contain several different themes. It should take many months of regular writings before a range of important subjects is touched upon. I hope that time and energy allow me to keep pace with the readers. I feel greatly honored and at once humbled that many readers have paid attention to my ramblings and have opted to give feedback and expressed valuable insights.

Re: #55 by bharatvaasi The whole point of SR`s article and his replies has been that big bad fed led by Alan Greenspan is the bad ole wolf and the govt needs to come to the aid of the money changers

Stop trying to set up a long apologia for these guys by passing the buck onto the fed and greenspan.

Thank you very much for your views of the article and my responses.

I hope that you didn’t read all of what I wrote. Because if you did read what I wrote, then I have miserably failed as a writer and have bot clearly stated my views. In that case, please accept my apology for the lack of clarity in writing prose.

…SR

Rabbani Sahib, scary scenarios that you have laid out can happen. Point however is, what’s the probability of this possibility. Obviously, if someone is totally invested in gold, he/she believes that probability is one. Those who are totally in stocks, knowingly or unknowingly, they are in the camp that believes the probability is zero.
I believe that there are so many contributing variables, some of which can be manipulated by governments and others not, that it makes it very hard for any human being to determine this probability with any certainty. Therefore, the amount of gold, or whatever other medicine that can be bought for this plague, would be proportional to one’s own judgement of that probability.
Are you going to discuss this in your next article?
Regards and thanks for the great article and facilitating the discussion.

The whole point of SR`s article and his replies has been that big bad fed led by Alan Greenspan is the bad ole wolf and the govt needs to come to the aid of the money changers other the people are going to lynch these poor fatherless people.

Now what I cannot understand is that these same moneychangers and grabbers asked the govt to bat an eyelid when the hardworking people were loosing their jobs and industries as a whole were going to the wall. That is tough these moneygrabbers and money changers said. Now it time that the govts left these fatherless people wallow in the sty they created.

Stop trying to set up a long apologia for these guys by passing the buck onto the fed and greenspan.

Re: tahmed32

Ahmed sahib the point you`ve raised about pension benefits deserves a more detailed treatment than is possible here. So if you bear with me, I want to write something about it in one of the coming columns.

As for blaming the guy(s) who came up with the idea of changing the pension systems, its of course the whole corrupt ruling class that has engineered a huge macro scale transfer of wealth from a very large segment of the population to a much smaller one (my dormant Marxist is screaming to come out, even in my `republican` days -- gosh, don`t tell my wife I referred to myself as a republican or we`ll have a divorce).

The two men most responsible for most of the ills are Sir Printsalotspan and former Tres. Sec. Ruben. They engineered this free credit orgy that led to the bubbles that prompted everyone to follow suit.

Re: faiseluno

You`ve raised several good points and since they are along the lines of matters I plan to write about (hopefully soon), I`ll keep this response short. There is one particular I wish to retort to below.

You wrote: [``...measuring fund managers against a benchmark is an effective evaluation tool. would you pay fees to a manager investing in utilities stock if his portfolio rose 15% while the broad utility index was up by 20%? ...``]

I wouldn`t pay any manager even a penny. But seriously, unless you look at absolute returns how can you judge success?

We invest to make money, not lose it. If you start with a hundred and end up with ninety nine, you`ve lost one. I don`t care how many more Tom, Dick or Harry may have lost, but I cannot keep a straight face and say that I was successful. If you beleive that I was successful because I didn`t lose as much as someone else and for that you are willing to pay me, boy, then you are just the kind of a person I`d love to have as my first client. :)

I`m sorry, you can;t sell me this relative success party line. This is only for the ``faithful`` that I`ve referred to in the article.

Maybe my eyes are bad, but I don`t see the invisible fabric. As far as yours truly is concerned, this emperor is butt naked...

...SR

#51 by sac [“…Notionals ae meaningless as far as risk levels are concerned. … most of these contracts are equal and offsetting the risk is actually pretty small. … derivatives curtail risk not enhance it. …”]

Again, this is a typical line of argument given by the trio of academics, market ‘pros’ and government bureaucrats. This trio has led us down a path of rosy dreams. This path leads into heavy fog and somewhere further along it could abruptly end at the edge of an abyss. The world is in the financial trouble that it is today because of all those Ivy League MBAs who studied just a little too much math and got carried away in their application of those equations to economics that should have been reserved only for physics.

In theory what you say about the offsetting risk in derivatives is correct, but unfortunately the real world is not always accurately predicted by models.

The harsh reality of our world is that risk cannot be eliminated, it can only be managed, transferred and distributed. This is a very critical point to understand. I shall repeat: risk cannot be eliminated.

Now, let us look at how, as you say, “derivatives curtail risk?”

Take the case of XYZ Corporation that has an open ended financial risk exposure to certain future possibilities that, if they happen, will be unfavorable to the company’s assets. The number crunchers have quantified a ‘tolerance limit’ beyond which they want to “curtail” their risk. What they will do is to employ a derivative and transfer that excess risk to someone else. But the risk still remains in the system. The bank that accepted that risk from XYZ for a fee, wants the fee but doesn’t really want all the risk. So it finds another party (or several parties) to whom it can further transfer that risk for a smaller fee (hopefully) and thus the chain goes on and on. In the end that big blob of risk, like the hot potato which no one wants to hold, has moved through several hands.

To be a bit specific lets take the safest type of derivative: the long option. Be it a call option or a put option, the buyer of the option has certain rights but no obligations, so, supposedly his risk has been curtailed and all he has lost is the premium he paid. Any market loss he experiences in the underlying asset (against which he purchased the option as an insurance), he should be able to recover by exercising his rights conferred by the option. But there is a potential problem: counter-party risk.

If every body was buying these options from God there would be no problem at all. God’s balance sheet, after all, is Almighty. Not so with mere mortals, be they JP Morgan or even Sir Allen Prints-a-lot-span.

The option seller, who assumed the market risk of the underlying asset in exchange for the premium he charged the buyer, has to be able to deliver. In the event of a loss he shall have to perform his obligations under the contract and make the buyer whole by assuming his losses. This seller, in turn, may have done the same with someone else like the insurance companies do all the time. The guarantees behind most of these contracts are backed by nothing more than the strength of the issuer’s balance sheet. In other words, a song and a dance, backed by very little else.

Under normal circumstances this all works well, but what would happen in a major crisis? If just one of the links in the chain of the multiple counter-parties breaks down, there could be a domino effect and the whole house of cards could come crashing down. The original hot potato could burn the hands of all those who passed it around.

Laugh all you may at these “doom and gloom predictions,” but they are real possibilities. These possibilities are the ‘Black Swans’ mentioned by Nasim Taleb in his excellent book Fooled by Randomness (recommended reading).

The college professors will smile, the bureaucrats will shake their heads and the market ‘pros’ will wave their hands impatiently and tell you that such pessimistic rubbish has no place in modern finance. They will say that in this new and improved age of reformed church of world finance such things cannot happen.

Yet George Soros, no stranger to derivatives himself, makes a pretty good case of the vast systemic risks in his Crisis of World Capitalism.

Warren Buffet says that this is a “ticking time bomb”.

And the eternally optimistic Sir John Templeton, whom I had the pleasure of listening to earlier this month, told the audience that he was “deeply worried” about the “great systemic risks” that we face today.

Now I don’t know about anyone else, but I vote with Soros, Buffet and Tempelton and against Uncle Greenie and his toddies. They claim they didn’t know that there was an equities bubble, and that even if they had known they couldn’t have done anything about it. They’ve also been telling us for now almost three years that the boom is coming “next quarter” or “next year” blah, blah, blah….


[“…Long term Capital fiasco is the closest the global financial system came to … a cascading chain of disastrous scenarios. Since that time financial institutions have strengthened their risk controls and legislation in the form of the infamous FAS 133 has worked wonders in reining in the machinations of the treasury departments…”]

You must be pulling my leg… An edict issued by a bureaucracy “worked wonders”…???

All Financial Accounting Statement 133, issued by the Financial Accounting Standards Board (FASB) accomplished was to add an extra layer of bureaucracy and increased paper work by mandating new filings and reporting procedures.

FAS 133 was issued sometime in 1998 or 1999 and went into effect in 2000, to my great amusement, on the same day that Magna Carta was signed by King John, 785 years earlier.

Ira Kawaller, who used to be a member of FASB’s Derivatives Implementation Group headed a detail study to measure the impact of FAS 133 implementation on risk management practices. I read that report and though the details escape me now, I recall that, in conclusion, FAS 133 was deemed ineffectual at best, and maybe even harmful at worst. Anyone who is interested can go to the AFP archives (Association of Financial Professionals) and find the report themselves.

Gawd...I really hope we are making some folks think by these discussions, because it is exhausting. Its making my head hurt too much, and here I thought we were just going to have some fun. :)

...SR

re sac post 51

want to avoid getting into a `take it or leave situation`. paki passport limits the choices i have in terms of career options. at this point in time, i really dont want to go back and work for nbp. but perhaps, you are a better person than than i am.

re tahmed32 #50:

SR may have been (un)knowingly disingenous about the $72 trillion derivatives figure. Notionals ae meaningless as far as risk levels are concerned. Its just like saying Pakistani missiles have a range of 2500 kms versus India`s 1800. What is of more importance is the payload they can carry and accuracy in hitting the target. Considering that most of these contracts are equal and offsettting the risk is actually pretty small. Contrary to popular opinion, derivatives curtail risk not enhance it. The Long term Capital fiasco is the closest the global financial system came to in terms of a cascading chain of disastrous scenarios. Since that time financial institutions have strengthened their risk controls and legislation in the form of the infamous FAS 133 has worked wonders in reining in the machinations of the treasury departments.

re faisaluno #47:

I have no idea what your point is. I must be dense.....or maybe I can attribute that to my Pakistani passport too.

later
-sac

DrDr #44 I stand corrected. I checked and you are right - Japan`s unemployment rate in September was under 6 percent. And the US unemployment rate isnt much lower than that nowadays. So I assume that the problem with Japan is not the level of unemployment but the extended time period (over a decade) that it has been there. And that is why Japan has an economic malaise while the US has a mild recession (since the latter has been around for just over an year).

SR #43 Agreed that those whose pension funds were not self-managed cannot be accused of being greedy and putting all their lifetime savings in risky assets. They of course blame the fund managers. I think here the blame lies more appropriately with whoever came up with the brilliant idea of switching pension plans from Defined Benefits plans (i.e. traditional pensions where the pension fund and/or the employer bore the risk) to Defined Contributions plans (i.e. the current favourite of employers, since risks are transferred to the pensioners). Of course, they still have their social security benefits, not to mention other income generating assets, and that explains why we dont see pensioners starting to starve on the streets in the US. Now, if they mess up the social security plans as some people fear...then you have a real problem.

SR #43 I did not realize that derivatives were at $72 trillion. This certainly exceeds the worldwide GNP, but then as I understand it derivatives are claims against future assets, not against today`s income. So they can vastly exceed the GNP. Given my ignorance on these matters, any light you can shed (and see if my understanding about the tenuous relationship between derivatives and the current year`s GNP is correct) would be welcomed.

sr.

thanks for posting a reply to my last post. still dont think that ``the plane falling 25k feet`` is necessarily bad as long as it develops the capacity to rise higher than its previous peak. economic bust cycles in the past have played an important role in insuring the success of american capitalist system. survive or die mentality will insure that things will be no different this time. surviving companies in sectors that have been most effected by the slump are in the process of adapting more sustainable business models. companies like amazon and dell now have a much better model than they did at the height of the boom. similarly, companies that survive the shakeout in the energy sector will be much stronger than their predecessors. the current economic bust has also enabled companies to get a handle on their wage costs. investment banks and tech companies will be the biggest beneficiaries of excess supply in the labour markets.

i also don’t share your assessment that the economy faces systematic risk because of financial meltdown as a result of large-scale defaults by highly leveraged consumers and financial institutions. consumer debt levels can be sustained as long as the economy does not suffers a prolong slump. japan has an extremely high saving rate but it does not seem to grow the economy. probability of large-scale bank default is pretty low as well. by historical levels, non-performing loans at money centre banks are at much lower levels in comparison to the levels seen in previous down cycles. notional levels in the derivatives market don’t indicate much in my opinion. the real question is strategy employed to manage risks. and as the success of credit derivatives market indicates, so far banks have been pretty successful in dealing with risk events like enron and worldcom bond defaults.

i do share your assessment that investors still have an unrealistic expectations of earnings from most of these companies. however unlike you, i believe that joe investor in peoria, illinois is still responsible for feeding the mania. joe investor still continues to believe that information he is fed is accurate despite the spectacular failure of the media to predict and explain anything of consequence that has happened over the last couple of years. on the contrary, joe still thinks that u.s. media is best in the world. one of the most insightful polls i have seen over the last month is the poll that indicated that 2/3 of the people polled believe that saddam was behind the wtc attacks. it is the same unquestioning belief of misinformation peddled out by reactionary republicans and their cronies that will be responsible for any economic hardship americans face in the future. these guys had chance change to throw some of the bums out in the last election but they refused.

on a separate matter, i still think measuring fund managers against a benchmark is an effective evaluation tool. would you pay fees to a manager investing in utilities stock if his portfolio rose 15% while the broad utility index was up by 20%?

re sac # 41:

if i was only paying attention to the market and ignoring the fundamentals, then i would have gone and blown up my raise because at peak my 401k had enough savings to last a lifetime. fortunately, i never bought the market is economy mantra and thus managed to save enough cash to help me in rainy days.

second, even during the boom, i was never in a position to walk in to my boss` of office to demand a raise. i guess one of the many downside of carrying a paki passport.

#44 by DrDr [``...SPY is vaulting. Hope you have the inyestinal fortitude...``]

Thank you for asking, but heavens have been very kind. This is not bad as compared to the Christmas rally of 1999. Like I`ve mentioned in the introductory ``confessions``, I was able to survive the Great Mania because of an eager willingness to take small losses, repeatedly. Discipline is a must for survival. When one has an open position, one must only look at the market action and act accordingly, without waffling. Hope, prayer, denial, wishful thinking, anger or joy have no place in a trader`s life. One has to plan one`s trades and then trade those plans. Those who trade for emotional experiences don`t last very long.

If its excitement that one is looking for, one needs to stay away from trading. One is far better off going to a motor cycle bar and telling that big fat skin head with tattoos that his Harley is a piece of shit. You`ll get all the excitement, but it will be far cheaper.

At this time my S&P positions are closed. They were closed yesterday and day before. The shorts were initiated, just prior to elections and rate cuts, on November 4rd and 5th (at the time the article was submitted, thus the need for disclosure of ``current position in instruments that are referred to in the written piece``). I always initiate positions in increments and get out the same way. The only exception is when I have to hit the ``eject button``. Then (and only then) do I get out of the whole position at once and use `market orders`. Routinely, the orders are always `limit orders` and always incremental.

Now I await a slightly higher push before re-initiating the short positions. S&P range between 925 to 875 seems like where the present equillibrium has settled. These are dynamic equillibriums and have to be watched very closely. Of course, tomorrow is the last trading day for October options, so this could move the range next week. As for the long side trading opportunities in the S&P and Nasdaq futures, I simply sit on the sidelines and let them pass. No opportunistic trades ever taken against the fundamental bias, no matter how attractive.

Reverse, would apply to gold futures, for example. I`ll only trade them from the long side. Same goes for Silver, Canadian dollar, Euro, Corn and Sugar.

...SR

SR,
SPY is vaulting. Hope U have the intestinal fortitude.

tahmed32
Japan`s unemployment rate is 18%? Don`t think so.

re faisaluno #38:

``people are confusing performance of the market with the state of the underlying economy.``

The market IS the economy. Never mind the underlying and the overlying. Why don`t you go ask your boss for a 20% raise? I am sure he or she will be more than happy to oblige. Heck he might even throw in a beamer just to keep you happy.

later
-sac

#39 faisaluno
Thanks for the post. Such news should make every muslim proud.Let`s hope & pray that the ignoramuses in Pakistan, who sneer at anything islamic & muslim as 7th century anachronism, are shamed into admitting their barbarity & ignorance.

Islam rules!
so must muslims...only if they identify themselves and have higher education in their own schools & in their own language.

#37 by tahmed32 [“… anyone who did not keep his portfolio balanced … lost his shirt. Those of us who maintained this balance and did not have dreams … never really had a problem. Thus, … the folks … got a bit greedy. …”]

Ahmed sahib, you are exactly right in what you write, and we couldn’t agree more. I have little sympathy for those who willingly engaged in their Sheikh Chillee style greedy fantasies and thought that they could find a short cut to instant wealth and in so doing lost their shirts. They didn’t plan to fail, they simply failed to plan and wanted to get something for nothing. No, those Johnny-come-lately investors deserved what they got.

My lament is over the millions of others, who were truly victims and are still being preyed on. These are the people who have little or no choice in the matter but perhaps are the biggest losers. These are not the greedy dentists who gambled with their spare cash and lost trying to catch the two-in-the-bush instead of keeping the one-in-hand. These folks are the ones whose insurance companies, pension funds and 401k plans deceived them and cheated them out of their hard earned life-savings.

There is also a class of people between these two extremes of retail investors. These are the people who are trying to be prudent and responsible and investing for their future retirements but don’t have the technical tools and therefore must rely on “professionals”. Unfortunately, in an atmosphere which is full of utter deceit and blatant lies that have come to be built into the system in recent years (more so than the baseline level of deceit which always existed) they didn’t stand a chance and were fleeced. It boils my blood to see that the official propaganda machine is still at work and continues to hoodwink the misinformed who are being set up to lose even further. My wishful thinking over here is that by making as loud a noise as I can, possibly some lay people may listen (Oh, heaven forbid, I’ll never presume to argue with the ‘pros’) and take a harder and more skeptical look at what they are being told. Hopefully, in the process some will take corrective measures to protect themselves.


#38 by faisaluno [“…people are confusing performance of the market with the state of the underlying economy. hence they are being too pessimistic about the future of u.s. economy which so far has held up fairly well in spite of the strong shocks it has received over the last couple of years…”]

You radiant optimism is a breath of fresh air. They say that both optimists and pessimists contribute to civilization. The optimist designs the airplane. The pessimist invents the parachute.

Occasionally, however, airplane engines do fail. The engines of the high flying US economy, in my humble opinion, have just sputtered. It is only prudent to pause and consider that a continuous thrust of the afterburners, even in the best made airplane cannot be sustained for ever.

Perhaps the financial markets are telling us something about the underlying economy to which we may be wise to listen.

You say that the economy “so far has held up fairly well”. A man sitting in a plane that has dropped from fifty thousand feet to fifteen thousand could also make the same argument. “So far” he could argue, “the plane is doing just fine.” He would be right, of course, though he may not be right for very long.

Achilles was a Greek warrior of the Trojan wars who was almost invincible in battle. Metal could not penetrate his skin because at birth his mother, Thetis, dipped him in the River Styx that made him invincible. But Achilles had a vulnerable spot where Thetis had held the baby and thus the water didn’t touch his skin. That was Achilles’ heel. It was there that he was struck by the arrow that Paris shot.

The US economy also has an Achilles’ heel. Its called debt. According to the Bank of International Settlements, 71% of the entire world’s current account deficit is in the books of the US. In 1980, the US was the largest creditor in the world. Today, the total US debt, is by far greater than the sum total of the combined debt of the entire world (minus Japan and Europe).

I have dear friend who lives in a nice place and drives a Mercedes while his wife drives a Lexus and wears big diamonds and nice jewelry while he wears nothing less than Gucci and Bally. Yet, their net worth is way deep in the negative six figures. Is he well off? Everyone in the community thinks so, but some of us know better.

On top of that there is the “river of financial sewage”, as Warren Buffet calls it, in the form of unregulated derivatives with an incalculable counter-party risk.


[“… important lesson … enron … was allowed to fail … experience in japan, germany, s.e. asia and s. asia shows this rarely happens ... as a result capital … gets allocated more efficiently in the u.s. because there are less distortions in the economy…pace of reform is also much faster in the u.s. in comparison to other parts of the world…”]

Totally agreed. But the operating phrase you use here is “in comparison to other parts of the world.” This is the problem. You’ve hit the nail on the head. And this complacency is what I object to. It is also the prevailing mentality that I see through out the mutual fund industry. They measure success in relative, not absolute terms. They tell you that they outperformed their benchmark by 5% and make it sound like they are heroes. What it actually means is that whereas the S&P 500 index lost 20% of its value, their fund only lost 15%. They lose 15% and still call it success. That is exactly what I am screaming about. I cannot lose 15% and pretend that I have won, neither can you, I hope. Yet these ‘pros’ do just that.

Same goes for the present US economic predicament. There is no question that the US has all of those relative strengths that you point out. Yet it does not take away from the fact that for the first time in almost seventy years the whole world’s capital structure and monetary system are at a precarious juncture. If a stampeding herd is heading towards the edge of a cliff, what comfort is it to say, oh well, our horse if not as close to the edge as those other horses are?

Yes, its not the same thing as a nuclear holocaust but it’s a simultaneous, synchronized downturn that we are witnessing the beginnings of and there is extreme systemic risk and we are all much less financially secure than we’re being told. Its bad enough without people being lulled into the false complacency that the next bull market, not to mention the next economic boom is right around the corner.

[“… congress has been fairly swift in creating groups that will monitor … parties responsible for the current mess. the accounting industry will now have to deal with the accounting oversight board while sell side research will be much stronger after restructuring takes place ... the u.s. financial system will be much stronger as a result of current reforms. …”]

Eventually that may well be true, but there is a very long and rough road from here to there. We’d better be prepared for the tough journey. Put on your helmets and seat-belts.

[“… money still continues to flow to the stock market despite the huge destruction in wealth over the last couple of years. yet no one can say now that the average investor is not aware of the downside. this is a good sign …”]

Not only is this not a good sign, it is criminal. There has been a tremendous misallocation of capital in sectors that are super-saturated with over capacity. Sadly, the money is still chasing yesterday’s dream investments and military industry. Today this same money ought to be flowing instead, into development of other sectors such as natural resource base industries (energy resources and fresh water assets, for instance), infrastructure upgrade, environmental and food source sustainability, and conservation etc. But no, Novellus, KLAC, Qualcomm are where the so-called ‘pros’ are pouring other people’s money to gt that high beta effect.

[“…u.s. economy can survive the threat of another 2000-3000 point drop in the dow because of its fundamental strength. … in fact a another precipitous [fall] in the stock markets will provide some of the best l investing opportunity for investors with a long-tern time horizon …”]

Yes, that is what I say also. When valuations will become reasonable it will be a good opportunity to invest in the fallen angels. That time, however, is not today as the official cheerleader would have you believe. It may be years in the coming.

[“… a fairly open labor market allows some of the brightest people to come to the u.s. to utilize opportunities denied to them in their own societies…”]

Also #40 by tahmed32 [“…population of the US … not merely staying relatively young and vigorous. It is increasing, and continuing to attract the best brains to its colleges and from there to its workplace and culture.

These are ``details`` that people dont see when they write about the wall street`s ups and downs. Yet these are details that determine where a nation is headed in the years ahead. …”]

You are right. It is this dynamism that will eventually come to the rescue. But between then and now there is a lot of sweat and tears. Fifteen or twenty years is only like an eye-blink for a nation’s history, but those who are nearing retirement today, they’ll be left holding the short end of the stick.

Every disaster has a happy ending eventually. The Black Death of Europe in the Middle Ages wreaked havoc on a whole generation. But we can argue that it was the best thing that happened. For those who survived it, there was more land per capita to go around and the standard of living skyrocketed.

My concern is about the here and now. There are real people with real lives that are in financial jeopardy today. What manna may fall from the sky in 10 years is not relevant when one may have concerns about securing the next meal.

All these fancy development models are well and good when you are a tenured professor at a university. They also look great to graduate students who build their Ph D thesis on them. But when you take the academic work of a brilliant graduate student, and start building a mountain of highly leveraged derivatives as high as the Everest then you get Long Term Capital Management style fiascoes.

The notional value of all leveraged financial derivatives in the system today is $72 Trillion. Yes, trillion with a “T”. That is more than double of the combined GDP of the whole world. JP Morgan alone is carrying over $20 Trillion in derivative exposure (by far more than any other financial institution). There are REAL SYSTEMIC RISKS to the economy. Who would you rather listen to? Your friendly “professionals” and government bureaucrats who follow econometric models designed by broke graduate students who don’t have a pot to piss in themselves, or to those who really understand the markets.

People like Sir John Tempelton, Warren Buffet and George Soros are all deeply concerned and make no bones about how extreme the risks are that we face. Yes, Ahmed sahib, you are very right in your assertion that “these are the details people don’t see.”

...SR

faisaluno #38 what you say makes perfectly good sense. It is interesting how both Germany and Japan went from one extreme (right wing dictatorships in wwii) to the other (a profoundly socialist environment, with lifelong jobs and all sorts of socialistic benefits). Neither approach has worked, and both economies are today characterized by unemployment rates that are almost 3 times that of the US.
AND they have even deeper problems - Japan has virtually shut the door on immigration. Germany has 10 percent population as immigrants from e europe and turkey, but has traditionally attracted the unskilled workers, and there is a strong anti-immigrant sentiment. Both countries, on the other hand, have rapidly aging populations which means the native population is actually projected to decline to almost 60 percent of what they are today by the turn of this century, and it is uncertain if these countries will ever have large numbers of skilled immigrants (and they dont seem to want any more unskilled workers - some of whom literally live on the dole for years on end, as I saw in Germany once when I was shown a house where immigrants from north africa and the middle east were having their groceries brought to them in a truck by a government-paid company!!).
On the other hand, the US has traditionally attracted the best and the brightest along with the ``tired, the hungry, the unwanted`` to its shores. Once here, they are expected to work, and the ``rags to riches`` creed of the US still remains strong. The population of the US is therefore not merely staying relatively young and vigorous. It is increasing, and continuing to attract the best brains to its colleges and from there to its workplace and culture.
These are ``details`` that people dont see when they write about the wall street`s ups and downs. Yet these are details that determine where a nation is headed in the years ahead.

urstruly, this might be of interest to you

Islamic-Style Banking Finds
New Support in Malaysia

By CRIS PRYSTAY
Staff Reporter of THE WALL STREET JOURNAL


KUALA LUMPUR, Malaysia -- Suresh Singh walked into his local Maybank branch four months ago to take out a mortgage for a new home in the suburb of Petaling Jaya. He walked out instead with an Islamic home-financing package.

``For the longest time, I thought Islamic banking products were for Muslims,`` says Mr. Singh, a Sikh. Interest is sinful in the eyes of Islam, so the bank bought Mr. Singh`s house and will sell it back to him, in fixed installments, for a premium equivalent to a 7.6% interest rate. As few banks have fixed rates on conventional mortgages here, Maybank`s offer was attractive. Other banks offered him variable rates of about 8%. He also signed up for an Islamic current account, which carries no monthly fees.

In Malaysia, where 60% of the population is Muslim, the government has been on a drive to make Islamic banking more mainstream. Islamic banking, which creates products that adhere to religious principles -- such as no interest -- accounts for just 8% of Malaysian banks` total assets.

Bank Negara, Malaysia`s central bank, issued a master plan last year that aimed to have Islamic banking comprise 20% of all assets by 2010. The idea is to offer Malaysia`s majority-Muslim population choices in financial products that comply with the religion`s beliefs and, at the same time, carve out a niche as a global leader in Islamic banking.

The international ambitions are starting to take hold. On Nov. 3, Malaysia, in conjunction with the Islamic Development Bank and central-bank governors from eight Muslim nations, set up the Islamic Financial Services Board in Kuala Lumpur, which will establish global standards for Islamic banking.

Even big foreign banks are scrambling to create Islamic financial products. London-based HSBC offered its first Islamic home-financing package last month. Standard Chartered plans to launch a more competitive version if its existing Islamic home package next year, along with a slew of Islamic retail products.

Maybank, Malaysia`s largest bank, says its Islamic financing business (Islamic bankers avoid the term ``loan``) grew 30% in the year ended June 30 to 8.5 billion ringgit ($2.24 billion), largely from mortgage financing.

And as Islamic banking has become more professional, it also has become more mainstream. More than 50% of Islamic financing now goes to non-Muslims such as Mr. Singh, according to Bank Negara.

Many banks here have offered Islamic-style financing for years. Deposits and financing packages are structured to avoid interest payments or charges to abide with Shariah, Islamic religious law. For example, account dividends are calculated on a profit-sharing basis. In the case of financing, banks act as traders, not lenders, and buy the asset in question, then sell it back to the customer.

But few banks considered Islamic banking to be anything more than a niche business, and did little to promote it. As a result, even many Muslims shied away. ``It has not been an easy sell just because most people are Muslim,`` says Ahmad Fuad Mohammed Ali, head of the Islamic banking division at Standard Chartered`s Malaysian unit. ``At the end of it, people still look at the returns.``

These products are gaining ground now because Bank Negara`s plan has given banks a top-down push, while the rapid growth of Malaysia`s middle class has provided bottom-up demand. ``You have a bigger middle class. They`re looking for choices,`` says Mr. Ahmad Fuad. Standard Chartered plans to use Malaysia as a test bed for products that will be offered later in Asia and the Middle East, he says.

Meanwhile, banks also are raising awareness that these products can do more than satisfy religious mores. Asia Pacific Engravers, the local unit of a German packaging company, took out a two million ringgit Islamic hire-purchase facility to buy equipment last year. Like Mr. Singh, the company was attracted by the low cost -- equivalent to 5%, versus the 6.5% rate attached to a conventional unsecured hire-purchase loan. And the rate was fixed for five years.

``HSBC came to see us, and said, `Take a look at this, you can fix it for five years. And it`s cheaper,` `` said Cletus Stephenson, a company spokesman.

HSBC raised $600 million for the Malaysian government by underwriting the first international Islamic bond in June. In conventional bond deals, the government issues a bond and promises to pay borrowers a coupon, or interest payment.

In this case, Malaysia`s federal land commission sold property to a special-purpose company, which raised money for the purchase by selling trust certificates to investors. That company then leases the assets back to the government. The certificate guarantees investors a stream of income from the regular lease payments and promises to pay the principal back in five years when the trust is dissolved.

HSBC launched a new Islamic trade-financing instrument earlier this month and its home-financing package during October. But Islamic financing comprises just 2% of the bank`s loan book in Malaysia -- a long way off Bank Negara`s 20% goal.

``Islamic banking is still a small business at HSBC Bank,`` says Sulaiman Sujak, executive director of HSBC`s Malaysian unit. But he says it is going ``to play a more significant role`` in the future.

people are confusing performance of the market with the state of the underlying economy. hence they are being too pessimistic about the future of u.s. economy which so far has held up fairly well in spite of the strong shocks it has received over the last couple of years. while the failure of enron and other companies has shown that crony capitalism is very much a part of the u.s economy, the failure of enron does also indicate that there are other centres of power which can check the power of cronies, even if brakes are applied too late. one of the important lessons of the enron bankruptcy is that the company was allowed to fail despite having ties with the strongest political office in the land. as the experience in japan, germany, s.e. asia and s. asia shows this rarely happens in other economies. as a result capital (public or private) gets allocated more efficiently in the u.s. because there are less distortions in the economy. connected to this, the pace of reform is also much faster in the u.s. in comparison to other parts of the world. where would japan be if ldp allowed creation of groups that act as a watchdog over its main supporters? similary, prospects of growth in germany would be much brighter if sdp was able to extract much needed concessions from the labour unions. in comparison congress has been fairly swift in creating groups that will monitor the activities of parties responsible for the current mess. the accounting industry will now have to deal with the accounting oversight board while sell side research will be much stronger after restructuring takes place. while bush and his buddies have cynically tried to hijack the process, the resulting brouhaha has forced them to temper their activity. the u.s. financial system will be much stronger as a result of current reforms.

another advantage u.s has over the rest of the world is that the environment is more favourable to entrepreneurs in comparison to the environment in other countries. this is because americans value economic growth beyond anything else and thus stigma associated with entrepreneurial failure is much lower than the stigma of failure in other societies and similarly the benefits associated with success much greater. money still continues to flow to the stock market despite the huge destruction in wealth over the last couple of years. yet no one can say now that the average investor is not aware of the downside. this is a good sign for entrepreneurs because they know that they will not be ostracized in the future for taking risks and failing. coupled to this, a fairly open labor market allows some of the brightest people to come to the u.s. to utilize opportunities denied to them in their own societies. in my university, the area around the school of engineering was referred to as the india/china border.

u.s. economy can survive the threat of another 2000-3000 point drop in the dow because of its fundamental strength. in fact a another precipitous in the stock markets will provide some of the best l investing opportunity for investors with a long-tern time horizon and a medium level of risk tolerance.

Interesting article, Sohail sahib. Your prediction (or is it the pir sahib`s?) that ``The bottom of this bear market could come sometime between now and the end of the decade. `` is about the max time period for business cycles, so what you say will probably come true (in the long run, everything comes true at one time or another - and of course no one knows WHEN in the 10-20 year period the business cycle will bottom out). And your prediction that the bottom (i.e. the right P/E ratio etc.) would be at 4500 and 3000 will no doubt send tremors in the hearts of those with money still sitting in stocks.
One thing is as true for stock markets as for ponzi schemes - those who lose their shirts got greedy. E.g., anyone who did not keep his portfolio balanced between low risk and high risk assets, as has always been standard advice in the business, lost his shirt. Those of us who maintained this balance and did not have dreams of making a million out of every lousy dollar we invested, never really had a problem. Thus, pir sahib and the folks in Saudi are undoubtedly honest and hardworking, but perhaps they got a bit greedy.

#35 by sac [“… I am curious-have you recently read Gibbon`s ``Decline and Fall of the Roman empire``? Almost everyone on Wall St.(especially those with fat severance packages and plenty of time to kill) seems to be in raptures about it. A sure sign that the herd mentality is alive and kicking. …”]

Have been a history buff for years. Didn’t revisit Decline and Fall since the late 1980s. Did, however, read the whole Masters of Rome series in the late 1990s. That was when the likes of me had a lot of time to kill as they sat on their hands.

Yes, sometimes the herd does catch up and not only contaminates the pristine meadows but also ruins our ursine solitude.

#34 by Urstruly [“… there must be something … to keep the American people well fed and prospered. The easiest answer is the neo-colonialism. Arabs still have some vulgar amount of money in all shapes and forms. .. history is going to repeat itself in … December or … January …”]

You may be right. On Veteran’s Day weekend I happened to be at a gathering where general Hugh Shelton was one of the featured speakers (as a part of my occupation I attend several different dog-and-pony shows and occasionally even return with a useful idea). One of the attendees asked the general about the likely time frame of the coming war with Iraq. He, after mumbling all sorts of disclaimers and qualifiers, said that it would ``have to be before May” of 2003. Accordingly, a speculator would buy call options on crude oil for the May expiration.

…SR

Dear Rabbani

Ok I admit that you managed to scare the bejesus out of me by confirming the feelings I already had for quite sometime. So if internal sources of generation of wealth are failing and interest based economy is something that qualifies as ``chuut-ti nahi yeh kaafir moonH ko laggi hoi`` there must be something that will be needed to keep the American people well fed and prospered. The easiest answer is the neo-colonialism. Arabs still have some vulgar amount of money in all shapes and forms. After the Gulf war they were made to pay through nose not only the ``war expenses`` but also had to share the 30% of the profits from oil sale (and probably they still do). I think the history is going to repeat itself in about late December or early January. This time it is gonna be no holds barred.

re SR #33:

``The US has a sophisticated one-party political “selection system” that is thinly disguised as a democracy``

Nothing wrong with that. The elite should be kept busy in trivial pursuits and let the rest of us go about our business. BTW I am curious-have you recently read Gibbon`s ``Decline and Fall of the Roman empire``? Almost everyone on Wall St.(especially those with fat severance packages and plenty of time to kill) seems to be in raptures about it. A sure sign that the herd mentality is alive and kicking.

later
-sac

#31 by sac [“… reason why America has done so well economically is because the politicians have always been inept and busy fighting each other. The more polarized they are, the better the country will do...”]

The reason ``why America has done so well`` is because of its unique history…

The US of the early 1800s was, in an economic growth sense, like the China of today. Starting with a clean slate it was not burdened with old cultural and economic structures. It had vast natural resources and a hardy and hungry population, willing and able to work. And above all it had a small and hands-off government that, unlike today, did not strangle the economy. The American productivity skyrocketted and economic growth was unprecedented. America sent a deflationary shock wave throughout the world economy much the same way as China is exporting deflation today.

Today (particularly post Vietnam), those advantages have been lost but the huge positive momentum has been carrying the economy for the last few decades. These things take time. After all, it took the Roman empire eight hundred years of decline to get wiped out. The over bloated US government is now a lethal parasite like most governments.

Living in hundred years of prosperous isolation, Americans have become the spoilt children of modern history. Today’s consumer lives luxuriously on the fertile slopes of a sleeping volcano. Now begin the rumblings, the exhalations and the tremors that presage a coming calamity.

Let me say, parenthetically, that these are overarching macro comments, and should only be viewed in the larger historical context. It has little bearing on our short lives as today’s market participants. Of course, I am not going to short the S&P based on my historical perspective.

[“…Weren`t you bemoaning the out of control government spending ? … Republican victories in the elections is frightening … consider the state politics of Massachussettes-a democratic state …”]

I was lamenting government size and it’s interference. Of course, spending is a part of it.

Heaven forbid, are you accusing me of being a democrap – I mean, democrat…?

The US has a sophisticated one-party political “selection system” that is thinly disguised as a democracy. Make no mistakes, there is only one political party in America that has two right wings. An extreme right wing and a right-off-center wing. Today’s R’s and D’s are just like the Victorian Whigs and Tories. They are the two-faced Janus of the imperial political system. Thy are today’s Roman patricians and knights.

Let me end this and get back to something productive. Just forget about all this market related nonsense, get rid of all paper assets and buy gold and silver. I am just rambling.

…SR

#29 by Urstruly
[“… what is happening in the automotive sector. … finally the market forces (meaning consumers) are dictating an interest free market..... automotive manufacturers are pushing and lobbying further to lower interst rates. .. other maufacturing sectors will start demanding interest free financing...

Are we headed for the collapse of interest-based financing and thus the collapse of an interest-based economy? Ultimately. …”]


“Collapse of interest-based economy?” No, not at all. In fact quite the opposite. Inflation and eventually ultra-high interest rates. There is no such thing as a free lunch.

Your observation is correct but you draw the opposite conclusion. I’ll try to explain.

When someone goes out on a drinking binge and has a wild party all night, they pay a price for it the next day. If we drink twenty shots of vodka while having wild fun at the party, we are going to get a hangover headache the next day. Nothing can stop that hangover. All the aspirin and yogurt in the world are not going to prevent the headache and the nausea. However, experienced drunks have discovered that if they take a little more alcohol in the morning, it will give them a temporary relief from the hangover, but later on the situation will get even worse. Similarly, heroin addicts also need a new infusion of the drug to keep from having stomach cramps and other withdrawal pains. All they can do is delay the inevitable.

Likewise, if we tell a big lie, we have to tell more lies to keep from getting caught, but all we do is make it worse and delay the inevitable. Also, if we borrow more than we can afford, then for some time longer we may be able to borrow more to partially repay the first lender, but our total debt keeps growing and all we do is delay the inevitable. No one can escape the consequences of committing excess in anything. This is the law of nature. It applies to individuals, to huge corporations and to national economies.

The automotive industry in America has been borrowing from the future. There is only so much demand for new cars. There is some elasticity in that demand and it can be increased at the margins by providing greater incentives such as zero percent financing and price discounts. But the result is not going to be prosperity. The profits have collapsed and without profits you can not keep being in business forever. All they have accomplished is to make people buy now instead of next quarter or next year.

Two facts need to be considered. (1) The average age of the vehicles on the road has become newer, meaning that fewer will need replacement sooner than would otherwise have been the case. And (2) more people (98% plus) already own a vehicle. Both of these facts are not good harbingers for future demand.

So why did they do it? I personally suspect that there may have been a hidden motive to make the economy look better so that the Republicans can do well in the elections. Detroit has not had a better friend in Washington than Baby Bush. This is just my conjecture, we’ll see if they keep up with similar extra ordinary sales gimmicks now that Baby Bush has his toadies controlling Capital Hill. Maybe Detroit will get some kick-back in the disguise of tax cuts or something. We shall see.

Now, the interest rates.

Money, ultimately, is a commodity. Admittedly, money is a special kind of commodity. It is not “consumed” per se, but has the special function of being a medium of exchange, or a storehouse of value, against which all the other goods and services in an economy can be “valued”.

However, like any other commodity, the “value” of money is determined by supply and demand. Have too much of it, relative to other things, and its relative value will go down, and vice versa. But as the total of goods and services expands, the supply of money has to keep pace with it so as to facilitate the smooth exchange of goods and services. This is a delicate balance. You cannot simply create wealth by increasing money supply. Money supply has to follow, not lead, the creation of wealth often referred to as growth in the economy. (The ‘elementary particles’ of the complex phenomenon called ‘wealth’ are labor, raw material, land and enterprise, not more paper. But I digress.)

Historically, the money function was performed by gold. Until the 1700’s (with an exception of a period in China a thousand years ago) paper money was not known. John Law, during the Mississippi bubble (more on that another time), was the first successful innovator of paper money in pre-revolution France. From there the concept took off. For a while the supply of this paper money was kept in check by a measure that was actual gold deposits, but then it started getting out of hand. Governments, the most corrupt and incompetent of all human institutions, could not resist the temptation of disregarding the limits imposed by their gold reserves and started printing more and more paper money to meet their ever expanding expenses. Basically, governments got in the business of forgery, or counterfeiting. With the advent of electronics, the situation has gotten much worse. Now it does not even take a printing press, paper and ink to create money. Its just a few keystrokes. The binge has exceeded all rational limits. As an anecdote, the US money supply in its broadest measure (M3), in recent years, has grown eight times faster than the GDP. (Not that the GDP a meaningful or true measure of the “economy”, but that’s altogether another chapter we should get into sometime later. Let’s get back to money and interest rates.)

The function of interest rates, more than anything else, is to keep some kind of a check on the supply of money. The federal reserve can do one of two things, BUT NOT BOTH. It can either fix the short-term interest rates and let the supply of money grow to its equilibrium level OR it can control the supply of money in the system and let the capital markets determine the (floating) interest rate that is commensurate with the available supply. Uncle Greenie`s Fed, over the last several years, has chosen to do the former. This ever lowering of interest rates (and consequent monerary expansion) will inevitably lead to the effective devaluation of the US dollar and ultimately to the rise of gold prices.

Governments and legislatures cannot change the economic forces any more than they can change time or temperature. Yes, they change time and call it “day light savings time” and its off by one hour. Tomorrow they may decide to call the freezing point of water as 25 degrees Celsius instead of zero and we can then all pretend to ourselves that its not zero degrees outside in January. But if we sleep outdoors we shall still freeze to death no matter what the new government approved thermometer reads. The Fed and the Congress cannot legislate away concrete economic reality, so don`t be counting on it. They can, however, give the drunk one more shot of vodka to delay the inevitable.

...SR

re SR (and rsaxena):

Markets are never in a state of equilibrium. Like a pendulum they are always oscillating between extremes. We had almost a decade of `irrational exuberance` and the now the pendulum is unduly tilted in the bearish domain. It will take sometime before it swings the other way.

The general population fell hook line and sinker for the `buy and hold` mantra trotted out by the mutual fund industry and it will take a long time for the psychological damage the present downturn has caused to be repaired.

At the same time, schemes like reverting to the gold standard or taxing foreign exchange transactions are not the solution to what is essentially a human weakness. Almost every other day there are stories in Pakistani newspapers about swindlers who take away people`s gold with promises of doubling them, never to return......Ponzi schemes are alive and well in slums of Lyari.....why blame the Hermes guys for their con jobs? Nobody wants to admit their stupidity, everyone wants to sue!!

SR:

I disagree with your bleak assessment about political life in America. The major reason why America has done so well economically is because the politicians have always been inept and busy fighting each other. The more polarized they are, the better the country will do. Republican victories in the elections is a frightening trend that will hopefully be reversed. Weren`t you bemoaning the out of control government spending in one of your earlier posts? As an illustration, consider the state politics of Massachussettes-a democratic state if there ever was one but for the past few decades, it has always had a Republican mayor!! Just perfect :)

later
-sac

re: sr

{Still, I’d like to add, and it seems we already agree, that the markets are neither efficient, nor random. The dice in this casino are loaded. One needs to be a card counter and play black jack. That is the only chance of coming out of this casino with some money. }

...thanks...that`s what i`ve always believed...it has to be...how else can one explain why so many people with huge egos and perfectly knotted hermes ties but little intelligence became so rich as bankers...

Mr. Rabbani,

Thanks for an honest and straightforward reply. I am anxiously waiting for the part-II now. Meanwhile, if you have time, would you like to comment on what is happening in the automotive sector. I have a feeling that finally the market forces (meaning consumers) are dictating an interest free market.....and the interesting thing is that so far automotive industry has survived this market demand; an immediate effect of this phenomenon is that automotive manufacturers are pushing and lobbying further to lower interst rates. I think the domino effect is just about to happen when consumers in other maufacturing sectors will start demanding interest free financing, thus the lobby that pushes legislators to lower interst rates will get even stronger. Are we headed for the collapse of interest-based financing and thus the collapse of an interest-based economy? Ultimately.

I would request you not to bring in religion in this argument, please.

#13 by HN [“…Arn`t you hamidm? Have a strong feeling you might just be...:) “]

No, I am not that character. Though, if the darkest secrets be revealed, it comes to light that our grandfather was the same man. He was a debauch philanderer and while he was plugging nani huzoor, he was also a regular visitor at nani hamdid’s havali.

#14 by Urstruly [“… how 2/3rd of the congress … on take from crooks… how the current crisis has effected foriegn investment (into US). …”]

First, let me thank you for your kind words. If any of my readers become aware of the perils faced by the hard working and honest people who do not understand the nature of this game my primary purpose will have been achieved. The average “investor” is simply a victim (or future victim) of the world’s biggest racket if he is blindly “investing” the fruits of their labor in the many scams (e.g., stock mutual funds) that go around Wall Street. Though I make my living in this arena, the naked truth remains that the stock market, at large, is basically organized theft. If one understands this simple truism, I have told my close friends and family for years, then there is a possibility to keep from getting ripped off. The commodities market, on the other hand, though many people will argue otherwise, is a much better and a more level playing field.

As far as the foreign investment in the US equity markets is concerned, the money inflow is drying up. This is a very involved subject and one that is inextricably intertwined with the exchange rate of the US dollar, and interest rates etc, I’d like to elaborate on it in one of the upcoming columns. In short, I just want to say that the US has gotten away with what, we were told in childhood, cannot be done. The saying was that you cannot fool all the people all the time. Well, the US almost managed to do that from 1995 to 2000. The whole bloody world was fooled by, what history will judge, as the greatest ponzy scheme of all times ever (so far). But the cat is crawling out of the bag and even though the process is slow, it is going to be a thorough cleaning job. What we have seen so far, I believe, was just the pre-soak cycle of the great washing machine called The Market. In the process of washing of the dirt on Wall Street the 2000 till 2002 was just the pre-soak cycle. Now we shall see, over the next couple of years, a thorough wash-with-soap-and-bleach cycle.

As for Congress, they are all corrupt politicians. Almost ALL government, as an invention of man is one of the worst forms of criminal enterprise. (Back in college days my religious friends thought of me as a liberal, my liberal friends called me a capitalist cronie, my capitalist friends called me a marxist and my Marxist frineds used to accuse me of being an anarchist)

#15 by sac [“…Laurence Tisch the CEO of Loews (LTR) put huge bets on market moving lower in 1997 and 1998. The company lost close to $1.5 billion dollars in less than five quarters…”]

I am no fan of Mr. Tisch. He was speaking at a gathering a year or two ago and was justifying their company’s insurance rate hikes (in addition to selling lumber and hammers, they also have a sizable insurance racket – I mean ``business`` – going on). Besides other nonsense, he also had the gall to claim that for every one dollar received in premiums, they had been paying out $1.08 in claims. So, as a curious member of the audience, during question time, I asked him how come he could claim that their earnings had been getting better and why had their stock been going up (at the time it was doing better)? In response, Tisch said, with a straight face, that they had made some good investments in the market and that is where their gains came from. So lets not even talk about the man. Besides, I don’t like his face.

[“…Julian Robertson one of the most venerated names in the hedge fund world had to dissolve his fund for severely underperforming the market in the late 90s while holding onto companies like UAL and a generally bearish stance on the market. …”]

That is an unfortunate example, but I don’t know what he did wrong? Surely, missing out could not be the only reason. Warren Buffet also “missed out” the whole tech mania, but it didn’t kill him. I recall that at the annual Berkshire stockholders’ meeting in 1999, for the first time ever many questioned his judgement, but Buffet stuck to his guns.

[“...you are aware of the maxim `don`t fight the tape`. Time horizon is the main element the trader is fighting all the time. Raise `em or fold `em. … Damned if you do, damned if you don`t. Right and wrong are dependant on the time horizon they are decided in. …”]

Very true. And that is why I am eternally damning Rubin and Greenspan for having the expanded the vast excess of credit and money glut environment which lead to the creation of the bubble. Not everyone was responsible for creating those conditions, but unfortunately, everyone is living through, and will have to continue to live with, pay for, and suffer through the aftermath of the bubble.

[“…I don`t think there is a credible alternative to US assets… The mighty dollar is the only currency the world trusts. … If we have indeed reached an inflection point in history … it doesn`t matter what commodity you put your savings in. Its Game over and we`ve run out of additional coins to play any longer…”]

This is another subject that I would like to write about when I get time. It’s a very involved issue, but I’ll say a few sentences here.

History is never linear. As the Roman and British empires have come and gone, so has the pre-eminence of their coinage. America is going to be no different. It just so happens, that in my humble opinion, we are at the same juncture in the history of the American financial supremacy as was Rome in later second century (before the great coin defacings) and Britain was just before, or perhaps during, second world war. The analogy does not quite hold, but my contention is that its at about the point which can be called the beginning of the end. By the end of the decade, or maybe in fifteen or so years, the US dollar should be worth a third of what it is today, if not less. The only thing that could save not only the US dollar but indeed the entire world monetary system is to rein in the fiat money with imposed monetary discipline that comes from some kind of a return to the gold standard. They will have to insert an “L” in the phrase printed on the US currency that could eventually replace the greenback after they are forced to demonetize it. IN GOLD WE TRUST, shall become the money slogan. This, as any PhD in modern economics will tell you, is heresy and I shall be accused of believing in witchcraft, but like I wrote in the Chowk FOMC introduction, I am only a quack.

#16 by tvarad [“…I trained with a major Wall Street Firm … I quit realizing it wasn`t my cup of tea…”]

You were probably training to be a Series 7 broker. That’s a sales job and those people are not required to know zilch. I felt the same way about sales and thus never made it past a first-glance when I flirted with Drexel. As for your theory on what goes on in the great casino world of Wall Street, I couldn’t agree more.

#17 by rsaxena [“...a theoretical question: if the market was truly efficient, investors were truly rational..”]

Your question seems rhetorical. Still, I’d like to add, and it seems we already agree, that the markets are neither efficient, nor random. The dice in this casino are loaded. One needs to be a card counter and play black jack. That is the only chance of coming out of this casino with some money.

#20 by Studebaker [“…He is in this business, can a car salesman advice you not to drive car? …”]

The more appropriate analogy would have been if you had called me a “sports car hobbyist” instead of a car salesman. Yes, I am in this business, but as I’ve stated in the Chowk FOMC –confession, history, structure, bias and philosophy- section, I do not sell anything to anyone. I have only one client and that is me.

…SR

fellow citizens of pakistan, rejoice! salvation is finally upon us. millions of citizens of our godforsaken land are on the verge of finding employment in the m.e. our kindly neighbor to the east is now the fourth richest country on earth and millions of its citizens slaving away in the gulf are about to give up their jobs and return back to the promised land to work as computer programmers for infy and mot. all we have to do is to insure that those indians don’t get scared by reading an article on the coming aids crises in india published in saturdays nyt. the article has special significance because it is published by the prophet of start tv watching india. we can use the e-terrorism skills taught to us during our compulsory stints at the local madarsah to crash the nyt website.

please do terrorism as soon as you land in the m.e. it should be obvious to us by reading the comments of all the rssniks on chowk that we cannot match the intellect of hindus and thus we will be fired by our arab masters. terrorism will be our sweet revenge besides enabling us to meet 70 virgins in jannat.

re: 12-head #21

...great...[deleted]

{Motorola to set up one of India`s largest captive R&D Campuses
14.45 IST 09th Nov 2002

By IndiaExpress Bureau

Motorola, Inc. has announced its plans to setup one of India`s largest captive R&D facility in Bangalore.

The 280,000 square feet campus is being setup for the Motorola Global Software Group (GSG) to integrate its two existing centers in Bangalore under one roof and address its expansion plans over the next few years. The new facility will require an investment of US $ 13 million and will be ready by January 2004. The unveiling of the symbolic stone for the new campus is being done by Mr. S.M. Krishna, Chief Minister of Karnataka today.

Speaking at the occasion, Terrence Heng, Senior Vice President & GM, Motorola Global Software Group said, ``Motorola prides itself on innovation which is a result of its astute focus on R&D. We were among the first telecom companies to realize India`s software potential and invest in establishing a development center here. Today, the India development center is an integral part of GSG operations and is developing cutting edge solutions in software and applications for Motorola products and on future technologies such as 2.5/3G mobile handsets, and networks, consumer electronics & others.`` }

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Ref # 21 & 22
China will always attract big-ticket investment dollars to build huge factories that churn out low price consumer goods. It gives poor villagers jobs at $.30/hour, the kind of investments that account for most of the $40B investment that the article mentioned. China will always be preferred over India for those huge factory investments because no one in Chine can disrupt utilities/power and other supply/delivery chains. Labor better not strike. Government will make sure that paper work proceeds rapidly after the senior most leaders have taken their cuts.
India will always attract high intellectual contribution oriented investments like software, medical research etc. $13 Million for example will provide enough space, computers, network connections etc. for say 200 programmers. If conditions in one city deteriorate, programmers can be moved to another city. The companies have ample supply of talented Indians who are happy there and foreign investors do not give a damn if rest of the infrastructure works or not.
Two different models – Indians can always show off big name companies, with low investments dollars, that will gladly give credit to Indians for any major contributions while poor folks may starve 20 miles outside these magnificent structures. We can also keep hoping that economic benefits will trickle down.
Chinese on the other hand, use their cheap labor under the gun. Only the top leadership gets the big cuts. Lowest level people work hard, get sufficient to eat and not allowed to complain. Population is under control. They do not have IITs but that can probably wait in their model.
Time will tell which model is better. We will perhaps get more Noble prizes and credits for research articles. Chinese (the masses) will always be better fed, look healthier, have higher per capita income and keep getting many Olympic medals.

re: snow

{Sound investment decisions are primarily made on the basis of a company`s future/long-term outlook or unique situation. }

...agreed...but the theory bothers me...here`s why:

...a valuation is just the present value of expected future performance, right?...if all information needed to assess future performance is available to all investors, and if all investors are equally rational, then at any given moment the stock should be priced accurately...that means, as per information known at this moment, there is no upside....unless some new information comes about - and the fractions of seconds i refer to is the time it would take the market to price the stock fairly again...with technology, that time should not be very long...

rsaxena,

Sound investment decisions are primarily made on the basis of a company`s future/long-term outlook or unique situation. Fractions of a second reaction to analyst`s under or overvaluing a stock would not make it a zero-sum game, since individual and institutional investors will continue to invest for the long-run and in accordance with their opinions and interests.

cheers

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{Countless well-managed and well-capitalized firms were gobbled up by the likes of Enron. }

...as an aside, good times or bad, well-run acquirers or scammy acquirers, M&A is a destructive habit best avoided (with the exception of cisco)...bankers do the dance and talk a big talk about ``synergies`` and run off with the booty...a few years down the road the shareholders of the acquiring company (paid the big premium) are left counting the money they`ve lost...most marriages of couples end up in divorce...to think that marriages of corporate behemoths with egos larger than shaq`s shoe will end any better is downright foolish...but hey, at least the bankers get a new loft in SoHo upon completing a few big deals...so it ain`t all bad... :)

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re: sac

{1The risk in `inaction` being greater than in action is best illustrated by 2 examples. Laurence Tisch the CEO of Loews(LTR) put huge bets on market moving lower in 1997 and 1998. The company lost close to $1.5 billion dollars in less than five quarters. Julian Robertson one of the most venerated names in the hedge fund world had to dissolve his fund for severely underperforming the market in the late 90s while holding onto companies like UAL and a generally bearish stance on the market. }

...sad...that`s what happens when too many short-term investors barge into the market...they even make the long-term investors not so long-term anymore...

...a theoretical question: if the market was truly efficient, investors were truly rational, and the same information was available to all, would anyone ever make money in the market?...seems not...the stock would be undervalued or overvalued for fractions of a second, hardly enough time for anyone but the fastest corporate mainframes to act on...and that too can be argued as unfair and done away with by regulators...

I trained with a major Wall Street Firm to become a Financial Consultant. Amongst those who were with me was an Insurance Salesman, an ex-Cop and an Office Assistant who had never invested by themselves in the Stock Market. I quit realizing it wasn`t my cup of tea but the others stayed on and to think that people will be putting my money in the hands of people with such backgrounds scares the hell out of me.

My theory about Wall Street goes like this: every generation has a set of suckers who haven`t gone through the pain of the previous generation and think they know it all. Wall Street has a new game periodically to snare these guys knowing that they will see it as one big Casino but won`t heed the warnings of the previous generation (it`s a new market, it`s a new age, these old fogies are too conservative etc. being their defense). The Wall Street crooks will allow them to win for a while and then pull the rug from underneath their feet.

Disclaimer: These are just opinions and are not meant to be used as investment advice (:-)).

Oh Finally we have an author who actually replies to his readers; that was becoming a rarity at Chowk. SR: it is a great article, well written, and informative. Would you like to comment on how 2/3rd of the congress and senate was (is?) on take from crooks like enron and the likes. How has this contributed towards peoples` 401ks turn into 201ks. Does the silence on this issue from both republican and democratic side means that honor among theives or is it simply you scratch mine I scratch yours. Please also write a short note on how the current crisis has effected foriegn investment (into US).

SR:

Thanks for your detailed response. I agree with most of what you say. A couple of explanations are in order.

1The risk in `inaction` being greater than in action is best illustrated by 2 examples. Laurence Tisch the CEO of Loews(LTR) put huge bets on market moving lower in 1997 and 1998. The company lost close to $1.5 billion dollars in less than five quarters. Julian Robertson one of the most venerated names in the hedge fund world had to dissolve his fund for severely underperforming the market in the late 90s while holding onto companies like UAL and a generally bearish stance on the market.

One can argue that had they held onto those positions their stands would have been vindicated today with the market going back to pre-1997 levels. The problem is that their views were wrong in the face of `general` sentiment. These guys were not crazy and irrational investors chasing the crowd. Infact quite the opposite. As an active trader you are aware of the maxim `don`t fight the tape`. Time horizon is the main element the trader is fighting all the time. Raise `em or fold `em. Countless well-managed and well-capitalized firms were gobbled up by the likes of Enron. They were playing by the rules. Enron wasn`t. But the catch-22 they found themselves afforded no way out. Either cook up your own books or risk being taken over or worse go out of business. Damned if you do, damned if you don`t. Right and wrong are dependant on the time horizon they are decided in.

2)I don`t think there is a credible alternative to US assets. Your theoretical example of Russia trading in Euros would be further bolstered if you considered that most of Russia`s debt is now in Euros. They don`t? The mighty dollar is the only currency the world trusts. Two thirds of the paper greenbacks in circulation are in mattresses outside the US(effectively an interest free loan to Uncle Sam). That trust as you rightly point out is based more on political foundations than anything else. If we have indeed reached an inflection point in history as you suggest, than it doesn`t matter what commodity you put your savings in. Its Game over and we`ve run out of additional coins to play any longer.

Look forward to your next submission.

later
-sac

P.S: I am not a trader, so I can afford the luxury of being wrong. You can`t :)

SR,

Arn`t you hamidm? Have a strong feeling you might just be...:)

Thank you Ras. I`ve been hiding from the Chowk interaction because I had nothing left to say which would have been any better than mere noise. And noise pollution is not what one wants.

Yes, I too wish that I had not squandered my youth in the Land of the Pure doing what I did. But that`s water under the bridge.

...SR

To ALL:

First, the use of first person plural pronoun (the ``Imperial We``) is too pompous for these more personalized interactions, so I am simply ``me`` here. 

Second, it may not be possible here to get into all the details, because many points raised will be addressed in coming columns. Also, if I may, several of the points will be addressed in the aggregate as opposed to one at a time. I ask the responders forgiveness because your feedback is very valuable and much appreciated.

Before taking up individual replies, I need to let out some more ‘ranting and raving.’ I beg your indulgence.

One day after the grand-slam (``tax-cutting, business-friendly``) Republicans’ victory AND the big 50 bps surprise cut by the head of the fed, fool-in-chief, uncle Greenie, the Dow MOVED by almost 185 points. It went UP... or didn’t it? Well, that is what it must have seemed to the ``professionals`` who have ``so many years experience`` not to mention MBA`s from Ivy Leagues. The only trouble is that they were doing a yoga head-stand and forgot that UP was actually DOWN.

Now, getting this off my chest feels better. I was bracing for a rough ride and had my seat-belt and helmet on. But it seems the bang may turn out to be a whimper, and all the 50 basis points cut does is to erode the dollar’s value, increase debt levels and boost precious metals. We shall see how this one plays out. In the mean time, I’ll keep my seat-belt and helmet on, thank you very much.

I am writing this from my hotel room in New Orleans where I am attending a five day investment conference. Getting a few interesting ideas, but mostly mambo jumbo and snake oil salesmen. Except a couple of speakers and workshops, I came and enjoyed the peace and quiet of my room.

Re: sac #1, What a great and stimulating response? Thank you. It was such responses that I thought would be challenging and will help me learn more. Several of the things you wrote I’d like to wait and refer to them in subsequent columns, but a few I’d like to comment on.

You write: [``…Your example is akin to someone saying an average car in 1929 cost 50``% of the average salary … now it costs 80% so the car prices are unjustifiably high. … production methods … financing options …variety …entirely different now than in 1929…``]

Excellent, excellent, excellent…!!! I have to do some serious thinking about this issue and examine several other assumptions. I don’t know if your analogy is valid or not, but on the surface it sure seems strong. So I have no cut and dry answer. This criticism has to be mulled over. Too much has changed economy-wide in 70 years, is what you basically say, therefore, the market cap to GDP ratios are not meaningful comparisons. Hummm…. You’ve made me think.

[``…the same `cool` heads are spending millions right now buying houses to keep up with the Jones’s that in hindsight will be worth not even one tenth as much. The reason for such `irrational` behavior is not too difficult to discern. At some point in time the risk in inaction becomes greater than in action. It becomes difficult to justify to your spouse why you didn`t join Qualcomm or Enron in 1995 and instead ended up at moth-eaten JP Morgan. …``]

Well, just don’t try to keep up with the Jones’s, is my response. Just because everyone goes to a fortune teller, or cheers for the sports star on the field, or buys a deluxe model luxury card on credit, does not mean that the cool headed person, who knows better has to do it too. I realize the wife’s pressure and all, but come on, if you can’t talk to your wife who else is ever going to listen to you.

My philosophy in life is simple: neither a borrower nor a lender be. If I cannot afford to lose it, I just cannot afford to own it. If I cannot pay for it outright, I just can’t afford it. Keeps things simple and easy. What’s wrong with living a simple and Spartan life? One should, I believe, aim to get in a position where one has the choice to spend as little as possible. Just because we can afford something doesn’t mean we out to do it because our neighbor has done it. In Punjabi there is a saying that if one sees that her neighbor has rosy cheeks, one ought not to make one’s own cheeks pink by slapping one’s own face.

Now coming to the issue of the ``risk of inaction`` becoming greater than action, that is the typical crowd behavior frenzy that a rational and cool headed investor needs to refrain from. It is precisely that which separates the men from the boys. JP Morgan, by the way, is truly ``moth-eaten``. When (did I say, ``IF``?) the price of gold exceeds $400, JPM may simply wither away into nothing (unless Sir Prints-a-lot-span waves his magic wand and creates yet more money out of thin air and ``injects liquidity`` to save JP Morgan – which, I believe they will have to). Of course, Morgan can unwind its short exposure to gold over the next 18 months at the earliest. The short-interest on gold forwards is well beyond some years worth of mine output. I’ve seen estimates from as low as one and a half years to ten years. But I digress.

[``…as long as foreigners keep stepping up to the plate to consume American assets. The global appeite for American assets is not going to dry up anytime soon simply because there are very few other places to invest. Even America`s avowed enemies keep their money where their mouths aren`t. American equities or treasuries. …``]

The operating phrase here is, ``as long as foreigners keep stepping up to the plate…`` In the past several years this has been the case. But, in this world of ours, nothing lasts forever. We may well be at a pivot point in history. Politics and economics are like hand in glove. One is dependent on the other and they are both, by extension, sociological and cultural phenomena. With the militaristic course that our world seems to be heading on with the sole hyper-power determined to press its own priorities, by force if necessary, things could change in a hurry. For example, the OPEC countries may refuse to peg the price of oil to the dollar and instead start insisting on payment in, say, Euro, or better still, gold? What happens then? There is already talk about the gold dinar. It’s the ``tropical depression`` that merits watching for it could turn into a class 5 hurricane. The US has military might, but economically, it’s become a giant with clay feet.

Also, if you were Russia and had to trade with Europe, why would you want to continue to deal in US dollars? Same goes for EU block and Asia? My humble view is, that the party is over. Last call has been issued and people may be rushing to get their final drinks, but that’s about it.
Next, in response to my example where I quoted the difference in what Nasdaq 100 companies actually did earn, collectively (an $82 Billion loss) as opposed to what the, in fact, reported on Wall Street ($19 Billion profit) you wrote: [``…the stock exchange is a zero sum game. So the money made by Wall street came out of John Q`s pocket. Big deal. It has happened for centuries and it will continue to happen till the average IQ exceeds 140. Don`t blame the Armani clad bankers for flushing John Q down the toilet.``]

I was not expressing moral indignation or pontificating need for virtue. No, no…you misunderstand. That was simply an illustrative example that proved the point I was making, i.e., there is no juice left in corporate earnings, especially in the tech sector, and that what we see is simply smoke and mirrors and abracadabra… Sooner, rather than later, the cat is going to be out of the bag and as it was for MicroStrategy when it went from $333 per share to under one dollar (well, maybe I exaggerate a bit).

#2 by snow Thank you for taking the time and trouble to give the positive feedback. Hope it was worthwhile cheap entertainment.


#3 by arjun_m [``…Thats not what i heard on CNBC. The suria talk was widely anticipitated by the analyst community...the increased level of publicity made Druckenmiller think twice about. He like to keep a low profile. ..’]

If you want to believe everything you hear on CNBC then you may risk bigger problems. CNBC or any of their representatives was not present there. I didn’t find then on the list of attendees. Maybe they were there under-cover.

I specifically asked Jim Grant to confirm it afterwards. He did. Evidently there were high level phone calls made and real pressure brought to bear. Jim’s integrity is beyond reproach, he is certainly not one to lie, nor I believe is Ravi Suria, though I’ve only heard him speak once
and don’t know him personally. CNBC, on the other hand, has been known to say a thing or two that does not exactly match all the facts…

#4 by rsaxena [``...is this the same ravi suria who used to be at lehman brothers?... ``]

As far as I know he is the one and only Ravi Suria, and believe me he knows his job.

#5 by godot on November 6, 2002 3:18pm PT

[``… you say don’t invest and enjoy your money today, for tomorrow it may not even see the light of day…``]

This is not what I say but you are getting close. All I am saying is that don’t believe what you see and hear. Don’t leave it to others. Touch, feel and taste before you sink your teeth into something. If you don’t understand it, don’t go for it. Either enable yourself to do it, or don’t do it at all. The ``it`` being referred to here, of course, is ``investing`` in the financial markets.

#6 by Ashok [``…9/11 itself created a black hole of 7 trilion dolars.And by the time operation enduring freedom ends it keeps enlarging. …``]

This is a very common fallacy, held widely and promoted by officialdom, that September Eleventh is the cause of Wall Street woes. I do not wish to belabor the point, but that is simply an exaggeration at best. It gives them an excuse to hide behind a tragedy. Just like the cheating husband whose wife dies in a tragic accident and later on he pretends to the world that his new mistress came upon the scene only after the tragedy and as a result of his feeling suddenly lonely.

#7 by DrDr [``…Have U read Manuel Asensio`s book: Sold short: uncovering deception in the markets? So U R short SPY. …ride out any margin calls. Good luck…``]

No, I’ve not read that one. But I hear its good, and have some knowledge of the points I believe he raises.

No I don’t do SPY. I employ S&P 500 futures contracts that trade on the Chicago Mercantile Exchange (and Globex after hours). I went short the day before. It was a risk which by my calculation was workable. My stop loss point was sufficiently far away that it didn’t get hit and the trade worked out just fine. The elections and rate cuts were touted to be far more significant than they should have been. Old hands will tell you that on such event driven market turns, especially highly anticipated and debated events, one should enter positions on rumor and close positions after the news.

As for margin calls, I never let it come to that because I love taking small losses, and as many of them as necessary. If you are a trader, you cannot avoid losses any more than a honey producer can avoid bee stings. I’ve got only one margin call in my trading career. That was in Spring 2001 when the Fed did a surprise rate cut. I had short OEX Call spreads which I rolled forward and botched up the trade. Then the brokerage houses suddenly changed the margin requirements because VIX exploded.

#8 by AAmir [``…Pitt`s Timing Throws S.E.C. Into Reverse …``]

Making Harvey Pitt chairman of SEC was like appointing Jack the Ripper, surgeon general. Pitt was the chief defendant of corporate accounting lobby nd a thron in the side of Arthur Levitt’s reform efforts. Nothing except good (for the little investor) can come from that jerk’s departure.

#9 by sadna [``…Re govt. budget, till a little more than one year ago there was a multi-trillion dollar projected SURPLUS which was going to be used for great things. Any idea what happened to it? ..``]

First of all, that surplus was mostly a mirage. Let us suppose I get paid $300 a week and I spend $310 a week. I am running a $10 deficit each week and I come to all my friends and borrow the $10 each week to make ends meet. Now suppose I get a raise of $10 next week and I spend only $300 this week. Obviously I will have $10 to spare. But I already owe so many of you $10 a piece which I’ve borrowed for ever that it will take a long time to pay every one off before I have an extra $10 left to save. So far so good. Simple. Now come the creative imagination. I go home and tell my family that over the next ten years I shall have so many thousands, therefore I am well on the road to riches. Will they believe me? Yes, they probably will, because they trust me. It will never occur to them that my calculations are mere flights of fantasy and that what happens in ten years is anyone’s guess. I could lose my job, or get sick or suddenly encounter unexpected expenditure, etc, etc. It would be stupid to bank on that surplus when in he mean time the concrete fact remains that I already owe all of you these hundreds of previously borrowed dollars.

Then comes Bush the younger and cuts taxes, thus reducing the governments revenue stream (Laffler curve notwithstanding) and increases spending. Back to earning $290 a week and spending $320.
If you think corporations lie to the public, wait till you find out how much worse the government and the federal reserve is. I hope to write about these things at a later date.

...SR

SR,

that was quite a long absence from CHOWK.

``These ‘pros’ are the shamans of The Street who will go to any length in convincing their clients that the Tooth Fairy is alive and well and that pigs can really fly.``

Enjoyed this very much. Too bad that you came to America in the 80`s.
Would have liked to have known you here in the 70`s.
Your Intro surpasses even your article.

Hope to hear more from you on CHOWK.

Ras

Re govt. budget, till a little more than one year ago there was a multi-trillion dollar projected SURPLUS which was going to be used for great things. Any idea what happened to it?

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Have U read Manuel Asensio`s book: Sold short: uncovering deception in the markets? He wrote this in 2000 at the PEAK of the market bubble.
So U R short SPY. U need 2 have a strong stomach brass balls and enuff capital 2 ride out any margin calls. Good luck!
The stock market is a scam unlike any other. If U see the equity market as a chance 2 own a piece of a company (like Buffett does) then U go by what U R willing 2 pay 4 the company given its finances INDEPENDENT of what the stock promoters say. By this criterion, the market value of every single company is bloated. Why then would U should U invest in the market? Coz the Greater Fool Theory sez another fool will pay U a premium 2 take the shares off Ur hands. A ponzi scheme more like.
I believe, in this market, if U had a lotta capital U can make a lotta money going short.

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Sohail,
So, you say don’t invest and enjoy your money today, for tomorrow it may not even see the light of day. Can’t agree more! I would just add to that make sure you acquire skills that can always sell not matter how old you are and what time period it is, for they can take your money but not your knowledge and skill (but do keep something under the mattress, ie, gold.)

Well written article, or I wouldn’t have read it!!! I also liked the disclaimer...very original!!!

...is this the same ravi suria who used to be at lehman brothers?...

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Sohail,
I really enjoyed your intro and history about yourself. Struck alot of chords.

Thanks.

SR:

You`ve argued the bear case well. I agree with you regarding the last pillar of `consumer spending` supporting the markets as being a sham. But you`ve left out a very intriguing piece of the puzzle. Markets are NOT driven by fundamentals but by emotion. At some point in time in the not too distant past, the coolest of heads bought priceline at 100 bucks a share. Some of the same `cool` heads are spending millions right now buying houses to keep up with the Joneses that in hindsight will be worth not even one tenth as much. The reason for such `irrational` behaviour is not too difficult to discern. At some point in time the risk in inaction becomes greater than in action. It becomes difficult to justify to your spouse why you didn`t join Qualcomm or Enron in 1995 and instead ended up at moth-eaten JP Morgan.

You may be right that its a long term bear market. You are equally likely to be wrong. Here are some rebuttals to the points you`ve raised.

1)``The total market cap of the US stock market at the peak of the 1929 euphoria was 81% of GDP, while the total market cap at the October, 2002, lows was still about 90% of GDP. By contrast, historically, the market cap in at the ‘bottom’ of bear markets has always been under 40% of GDP.``

Your example is akin to someone saying an average car in 1929 cost 50``% of the average salary of an American worker and now it costs 80% so the car prices are unjustifiably high. No taking into account that production methods of cars, financing options, not to mention variety of cars is entirely different now than in 1929.

2)``Homeowners’ equity, despite the historically high home prices, is at an all time low. John Q. Public has kept up his frivolous ‘consumption’ of things he didn’t need, made in places he could not pronounce, with money he did not have. He has tapped out his new found home equity in the biggest re-financing binge in memory.``

Historically low home equity levels in themselves are not as important as the ability of the the homeowners to keep paying their mortgage payments. While I agree that this is a problem, boom and bust cycles in real estate generally have longer cycles and generally strong local characteristics. The bubble is right now concentrated in only the residential real estate markets while in others like commercial it has already burst.

3)``The US current account deficit is fast approaching $500 Billion a year. In other words, to keep the economy where it is, let alone improve anything, more than one and a half billion dollars of foreign investment is needed every day.``

Once again this is not a problem as long as foreigners keep stepping up to the plate to consume American assets. The global appetite for American assets is not going to dry up anytime soon simply because there are very few other places to invest. Even America`s avowed enemies keep their money where their mouths aren`t. American equities or treasuries.

4)``The total cost of government (federal budget, all fifty states’ budgets plus all the county and city budgets combined) in the US is about $3 Trillion per year. The total number of wage earners who get a W2 form, is 134 million. Assuming, they all work 40 hours a week and work all 52 weeks of the year, it costs $10.76 per hour, per worker, to support the government. The minimum wage is only half that, so it takes two minimum wage employees, per hour, to pay for the paper pushers in the government. ``

I am confused about the point being made here. What`s so different about America? Governemt inefficiency or pension liabilities? Apart from one or two first world countries in the world, unfunded pension liabilities are a chronic problem. Japan, France etc. are all in trouble. The major factor stopping England from joining the European union is its fear of getting in the same mess as the rest of Europe on that count.

5)``All the “improvement” in GDP numbers is coming from non-productive ‘consumer spending’ and ‘government spending’. One of the largest components of recent GDP so-called ‘growth’ has been automobile sales that were propped up by zero percent financing. In other words by borrowing from next quarter and next year sales. Now auto sales are dropping off like a rock.``

So the GDP is stagnant. The imperfections of GDP merit an article in themselves. Drawing a link between the suicidal auto industry and GDP is an exercise in futility.

6)``Delinquencies, defaults and bankruptcies are all on the rise.``

Credit advancement standards are being strengthened across the board. Layoffs are on the rise. We`ve been here before also.

7)``In 2001, the Nasdaq 100 companies, reported an accumulated total of $82 Billion in losses to the Securities and Exchange Commission. However, the same 100 companies, for the same time period of 2001, reported a total accumulated profit of $19 Billion to the public through their touts on Wall Street. This is a discrepancy of $101 Billion. In other words, over a billion dollars average per company. That is the extent of lying that went on in 2001. This year the reported earnings are far worse and we have no idea how much even that is smoke and mirrors.``

Come on Sohail. Get real here. You know fairly well, that what happens on the stock exchange is a zero sum game. So the money made by Wall street came out of John Q`s pocket. Big deal. It has happened for centuries and it will continue to happen till the average IQ exceeds 140. Don`t blame the Armani clad bankers for flushing John Q down the toilet.

Once again bull/bear markets or depressions/recessions take a long long time to play out and are difficult to analyze due to behavioural patterns that are extremely complex. By all means keep your money in gold but remember nobody ever found Midas`s grave.

I`ll wait for your next article.

later
-sac