Moral Hazard PLUS – Part 2

Part 2 – Revelations
 Moral Hazard symbol utilized by theMarketSoul
In part 1 of this article we focused on the economic cycles and the underlying drivers for future Moral Hazard risks.
In today’s edition we will dwell a little on the revelations 2014 brought about in a series of disclosures and financial regulatory deals concluded.  As Tony Robinson put is so eloquently in a recent Twitter feed:  “In 2014 £1.4bn in financial penalties were paid by UK financial institutions. whenever has a legitimate industry acted so lawlessly?

 

Image used to convey the idea of currency conv...
Image credit: Wikipedia

 

What we notice is that only the financial institutions (and consequently their customers) bore the fines, no individual has yet been brought to justice and account for the near fatal financial collapse he 2008/9 Financial Crunch brought about.  Yes, individual traders who acted recklessly and outside of the bounds of their remits within financial organisations have been brought to account, however, the scale and ferocity of the collusion by Forex traders, the Libor scandal, PPI mis-selling, etc., etc., has yet to yield individuals sanctioned and barred for ever acting as officers and employees of these large financial institutions.  Do the regulators and law enforcers and criminal justice system believe that the market will be protected by not taking appropriate action?  The longer we leave punishment and sanctions off the agenda, the more urgent the growing threat for Moral Hazard PLUS will be.
Therefore, we have now had and will no doubt continue to have revelations drip fed to the consumer masses, but more importantly will we take the necessary steps to mitigate individual Moral Hazard risk, as a lot has already been done to tighten and improve regulation at the institutional level?
This is the biggest and most burning question we believe drives Moral Hazard PLUS today and not the near term future.
In the concluding part of this article we will wrap things up by concentrating on large scale corruption and unpunished collusion that fester and provide fertile soil for Moral Hazard PLUS to continue to grow and exist.
© theMarketSoul 2015

Some Questions for Europe

After the conclusion to what some pundits called a ‘tumultuous week’ for Europe (week ending 11 May 2012), we still find ourselves asking some important questions.

Europe Simulator
Europe Simulator (Photo credit: wigu)

We all know that the question is not around what growth, where growth or why growth.  The fundamental question in Europe now is:

How Growth?

For way too long Europe and its leadership had taken its eye off the growth ball.  They had taken their eye off that ball focussing instead on creating the conditions for a ‘stable’ internal market, forgetting that it was all actually centred on competitiveness and growth creation!

Too much needless bureaucratically driven regulation, not creating the sustainable conditions for growth, but rather the spiral into debt driven oblivion…and therefore leading to the volatility and the instability we currently experience!

So the choice now comes down to how do we drive growth, in the face of an electorate that favours public sector driven growth, rather than private sector led growth.

It must make common (or at the very least common enough) sense for private sector growth incentives being created, rather than debt fuelled public sector or even Keynesian focused supply side stimulus. But no, the discourse in Europe has not been around stimulating demand by creating the conditions for competitive led export fuelled growth!  Instead, the in-fighting and constant politicking around balanced budgets and debt to GDP ratio targets and endless pacts to patch the patient with half-baked policy sticky plasters has contributed to exactly the opposite outcome the leadership tried to create in Europe, namely a stable platform for internal market competitiveness.  They forgot about the world changing outside the ‘Chinese wall’ of an expanded 27 member union.

And now the electorate has firmly rejected the austerity programmes, in both Greece and France, because they have not been educated in the dangers of public sector excesses.  Nobody in Europe (except for maybe Sweden) realised that giving the “Engine of Growth”, namely enterprise and entrepreneurs an incentive to create businesses and employment opportunities, is actually tax reductions and not increases, combined with tempering public sector growth and reducing labour market inflexibility.  Most European countries have youth unemployment; the hungry, tech-savvy and street smart under 25’s, running in double digits, of anywhere between 15 – 50%, depending on which country or statistics you want to believe…

We beg you Europe

For the sake of yourselves and the rest of the world, we beg you Europe (and off course we mean the leaders of Europe) to think about the following key growth criteria, as part of any ‘Growth Pact’ you might negotiate in the coming months:

  1. Reduce the size of your bloated public sectors
  2. Introduce private property ownership incentives and pension reforms
  3. Lower your punitive tax rates
  4. Reform your burdensome and needless regulation, opting for streamlined market driven regulatory stabilisers
  5. Introduce labour market reforms and encourage flexibility and mobility
  6. Encourage and actually treat your citizens like the responsible ‘conduits of growth’ and employment creators they are and can be
  7. Encourage personal and community based accountability
  8. Be tough on crime, but fair on punishment and reform

And above all believe, think, do, act and (if you must) enact economic GROWTH!

theMarketSoul ©2012

Trust, Risk and stifled Innovation

In the light of the recent Citigroup’s settlement of mis-sold Hedge Fund investments, we issue this brief opinion piece on the interactions of Risk, Trust and Innovation:

Citigroup

We don’t think it is so much about TRUST or trusting institutions anymore but has always been about Caveat Emptor (Buyer beware).

No investor can or should trust institutions without conducting their own due diligence and risk profile / risk appetite assessment first.  In the past investors could possibly rely on professional ‘trusted’ advisors to help then navigate the due diligence part, at least in theory.  Risk and risk appetite assessment was the more tricky part and not even the professionals had sophisticated enough tools to help their clients through this quagmire landscape.

In some recent papers, researchers argue that ...
In some recent papers, researchers argue that the return from an investment mainly results from exposure to systematic risk factors. Jaeger, L., Wagner, C., “Factor Modelling and Benchmarking of Hedge Funds: Can passive investments in hedge fund strategies deliver?”, Journal of Alternative Investments (Winter 2005) (Photo credit: Wikipedia)

We believe this is the unintended consequence of over regulation or an over regulated environment.  Relational trust has been eroded in favour of ‘legislative trust’ and therefore the impersonal ‘hand of public scrutiny’ is supposed to protect the innocents.

Trust
Trust (Photo credit: elycefeliz)

We need to ensure the pendulum swings back to a happy balance between relationship and legislative trust, unburden ourselves from the over regulated and expensive compliance environment we have allowed to engulf and overwhelm us, not adding any value, but stifling innovation instead.

theMarketSoul ©2012

 

Source Article: http://www.garp.org/risk-news-and-resources/risk-headlines/story.aspx?newsid=44034

Where will all the new money come from?

Seal of the United States Department of the Tr...
Image via Wikipedia

Today’s brief analysis of US Treasury Yield curves and the Debt profiles of both the USA and Italy highlights the enduring question in the title of this post.

The first graphic highlights one important issue.  We chose 2 August 2011 versus 17 February 2012 as key dates to compare the US Treasury Yield curve.  If we cast our minds back to 2 August 2012 two key facts emerge:

  1. This was the D-Day of the US Debt Ceiling vote
  2. The US still had a Triple A credit rating

Image

The key take-away from the Yield Curve comparison is that even with a ratings downgrade, the US is actually able to borrow new capital at a lower rate of interest 6 months on.

However, to pour a bit of realism into the analysis, we highlight two interesting Debt profile graphics below.

Image

The first one is the USA Treasury Maturity curve (admittedly 6 months out of date), highlighting when the current debt will need to be redeemed or rolled over.  The second is the Italian Bond Maturity curve.  You will notice just how similar the USA and Italy Debt Maturity profiles are.

 Image

From this comparison, the critical question currently for us is:

Where will all the new money come from to roll over the debt maturing during the next 3 – 12 months?  QE is one option, but investors still need to be convinced that their capital is safe and relatively risk-free.  It is the Risk-free equation (or investor risk appetites) that needs to be explored in more detail.

theMarketSoul ©2012

Irony and Downgrade Anger

It is with a little amusement that we scanned through the Economic headlines today, following Standard & Poor’s decision to finally downgrade France’s and other Eurozone nation’s Sovereign Debt rating.  France lost its prestigious triple A (AAA) grade to AA+.

Sarkozy and French anger?  Indeed!

This image shows Nicolas Sarkozy who is presid...
Image via Wikipedia
Off course the irony is that an “outsider market agency” has at last pushed a button it has threatened to utilise, forcing a pause for both governments and investors alike.

But the problem is timing as far as Mr Sarkozy is concerned.  This is a Presidential election year in France, so this comes as a slight humiliation to Mr Sarkozy.  And so it should be! He should be shamed out of office! Therefore, hopefully S&P’s decision will  help the voters and tax payers of France sit up and realise that incompetent leadership and decision making in the Eurozone economies now urgently needs to be ‘punished’.

Thank you S&P, for taking this action, because the actions (or rather inaction) of the Eurozone bureaucracy and leadership so far in addressing the root causes of the multiple crises, is continuing to drag the global recovery off course.

Decisions to circumvent exiting (inadequate) European Institutional frameworks and pulling the wool over European Citizens eyes over the inadequate administrative burdens the bureaucrats have imposed on its Citizenry must finally come to an end.

Eurozone 02
Image by slolee via Flickr

Hopefully, we’ll see some slightly more competent new faces in the Eurozone leadership pool and summit photo call line ups very soon… Innovation in Europe might have to start with a new set of leaders?

Countries using the Euro de jure Countries and...
Image via Wikipedia

theMarketSoul ©2012

Our Lessons from 2011

 

We decided to summarise our learning from 2011 into two brief thoughts:

 

The May 1, 2010 cover of the Economist newspap...
Image via Wikipedia
  1. The pains and strains of the economic sovereign debt melt-down in 2011, should stand us in good stead to deal with even more debt and sovereign strain in 2012, as More and Bigger Europe continue to miss the point; this being that more bureaucracy and more government and regulation will not get the INNOVATION engine started again to Recapitalise Europe!

    Graphic "When Greece falls" presente...
    Image via Wikipedia
  2. Translational differences will matter.  The CLOUD is a huge business and business model transformation opportunity.  IT ‘Geekery’ and language could scupper this potential opportunity and we need to develop more ‘CLOUD TRANSLATION’ services so that a broader community and eco-system can get involved in an aspect of “INNOVATION ignition” in 2012.
Clouds over Tahoe HDR #1
Image by Bill Strong via Flickr

All the best and good luck in 2012.

 

theMarketSoul ©2011

More and Bigger Europe…Is that what we really want?

wm-license-information-description-missing wm-...
Image via Wikipedia

Yes, it will be more bureaucracy and bigger financial problems down the line…

We pick up our analysis this week in the dusky glint of the aftermath of the (latest) EU Leader summit to put together a rescue package for the Euro.

More bureaucracy?

The inspiration for this comes for the ‘people pulling the wagon versus the people in the wagon’ analogy utilised by Dan Mitchell of International Liberty.

In an article we wrote earlier this year we very clearly called for INNOVATION as an engine of growth in Europe, yet all the politicians and bureaucrats can deliver are bigger EU institutions, hence, more and more people piling into the wagon!  Aren’t some of us getting not just tired of pulling the wagon, but frustrated and exhausted too.   Are these not some of the ingredients necessary to breed and incubate extremism?

Deutsch: Europäischer Rechnungshof English: Eu...
Image via Wikipedia

Bigger financial problems?

In another of our earlier articles we mentioned the dangers of Moral Hazard.  By not addressing the fundamental problems of big bureaucracy (we are in danger of starting a circular argument here), debt accumulation, regulatory stifling, the ‘EFFICIENCY’ drive will permanently drive INNOVATION (and hence future growth) out of Europe.  Let’s face it, if it was not for the expansion of the EU towards the vigour of the Eastern and Baltic states, there would be no growth and opportunity and Europe would not be an attractive place to do business.

Europe’s maturity (and risk averse cultural norms) are now so engrained and an anchor and drag on innovation that attracting Foreign Direct Investment (FDI) (and purchasers of sovereign debt) will come more and more of a challenge in future.

The brave thing to do, in our opinion, was to stand up for a fragmented Europe, as David Cameron was prepared to do, because to be lead blindly down the alley, just to be beaten and bruised by the rest of Europe, would not only be folly, but a disaster for Britain.

Deutsch: Weltkarte mit Fokus auf Europa Englis...
Image via Wikipedia

Only time will tell, but the Eurozone and sovereign debt crisis has dominated the headlines for long enough, and will continue to do so for some time to come…

theMarketSoul ©2011