Archive for the ‘Financial Markets/ Finance’ Category

When financial markets misread politics

November 16, 2015

Well as they say money has no color. Financial markets are pretty notorious for saluting the rising sun no matter how scorching the heat of the sun is likely to be. As this sun descents, the markets quickly shrug off the baggage and ride on to the next rising sun.  All this happens without minimal fuss and behaving as if nothing has happened.

Dani Rodrik has a piece on financial markets responding to Turkey elections:

When Turkey’s Justice and Development Party (AKP) defied pundits and pollsters by regaining a parliamentary majority in the country’s general election on November 1, financial markets cheered. The next day, the Istanbul stock exchange rose by more than 5%, and the Turkish lira rallied.  Never mind that one would be hard pressed to find anyone in business or financial circles these days with a nice thing to say about Recep Tayyip Erdoğan or the AKP that he led before ascending to the presidency in 2014. And make no mistake: Though Turkey’s president is supposed to be above party politics, Erdoğan remains very much at the helm.

Indeed, it was Erdoğan’s divide-and-rule strategy – fueling religious populism and nationalist sentiment, and inflaming ethnic tension with the Kurds – that carried the AKP to victory. Arguably, it was the only strategy that could work. After all, his regime has alienated liberals with its attacks on the media; business leaders with its expropriation of companies affiliated with his erstwhile allies in the so-called Gülen movement; and the West with its confrontational language and inconsistent stance on the Islamic State.

And yet financial markets, evidently placing a premium on stability, hailed the outcome. A majority AKP government, investors apparently believed, would be much better than the likely alternative: a period of political uncertainty, followed by a weak and indecisive coalition or minority administration. But, in this case, there was not much wisdom in crowds.

It is true that the AKP had a few good years after first coming to power in late 2002. But the party’s room for mischief was constrained by the European Union and the International Monetary Fund abroad and secularists at home. Once those limits were removed, Erdoğan’s governments embraced economic populism and authoritarian politics. Investors’ apparent optimism following the AKP’s victory recalls Einstein’s definition of insanity: doing the same thing over and over and expecting a different outcome.

:-) How similar all this resembles India’s politics as well!

Prof Rodrik says this does not apply to Turkey alone:

Turkey certainly isn’t the only case where financial markets have misread a country’s politics. Consider Brazil, whose currency, the real, has been hammered since mid-2014 – much worse than most other emerging-market currencies – largely because of a major corruption scandal unfolding there. Prosecutors have revealed a wide-ranging kickback scheme centered on the state-owned oil company Petrobras and involving executives, parliamentarians, and government officials. So it may seem natural that financial markets have been spooked.

Yet the most important outcome of the scandal has been to highlight the remarkable strength, not weakness, of Brazil’s legal and democratic institutions. The prosecutor and judge on the case have been allowed to do their job, despite the natural impulse of President Dilma Rousseff’s government to quash the investigation. And, from all appearances, the probe has been following proper judicial procedures and has not been used to advance the opposition’s political agenda.

Beyond the judiciary, a slew of institutions, including the federal police and the finance ministry, have taken part and worked in synch. Leading businessmen and politicians have been jailed, among them the former treasurer of the ruling Workers’ Party.

Financial markets are supposed to be forward-looking, and many economists believe that they allocate resources in a way that reflects all available information. But an accurate comparison of Brazil’s experience with that of other emerging-market economies, where corruption is no less a problem, would, if anything, lead to an upgrade of Brazil’s standing among investors.

This emphasised bit is what textbooks usually preach. But political economy of finance (the real world finance) is much different. Here, how financial markets align themselves to ruling political party is as important. How they eulogize the political leader and build grand narratives over big bang reforms and so on is quite a story by itself

He also picks examples of other countries and finally ends:

We know from painful experience that financial markets’ short-term focus and herd behavior often lead them to neglect significant economic fundamentals. We should not be surprised that the same characteristics can distort markets’ judgment of countries’ governance and political prospects.

Well said.

As they say, the show must go on. Not many have mastered the phrase as financial markets have done..

How to explore Arctic sea? via govt ship or private ship?

October 29, 2015

Chris Edwards of Cato has a nice post on the topic.

Being from Cato his answer is of course private. There is some research backing the view as well..

In researching an upcoming study on privatization, I came across an interesting illustration of the advantages of private science over government science. Private science focuses on efficiency and results, but government science maybe not so much.

The study by Jonathan Karpoff in the Journal of Political Economy found:

From 1818 to 1909, 35 government and 57 privately-funded expeditions sought to locate and navigate a Northwest Passage, discover the North Pole, and make other significant discoveries in arctic regions. Most major arctic discoveries were made by private expeditions. Most tragedies were publicly funded. By other measures as well, publicly-funded expeditions performed poorly. … Although public expeditions made some significant discoveries, they did so at substantially higher cost (as measured by crew size or vessel tonnage) than private discoveries.

Historical accounts indicate that, compared to private expeditions, public expeditions: (1) employed leaders that were relatively unmotivated and unprepared for arctic exploration; (2) separated the initiation and implementation functions of executive leadership; and (3) adapted slowly to new information about clothing, diet, shelter, modes of arctic travel, organizational structure, and optimal party size. These shortcomings resulted from, and contributed to, poorly aligned incentives among key contributors.

My upcoming study will look at the advantages of privatizing federal activities such postal services, air traffic control, and passenger rail. But policymakers should also explore the advantages of privatizing federal science activities.

Cato adjunct Terence Kealey has written about the advantages of private over government science, and he will discuss that topic at an upcoming Chicago seminar.

Meanwhile, if you plan to explore the Arctic, it would be best to go on a private rather than government ship. There would be less chance of getting scurvy–at least that’s the way it used to be, according to Karpoff.

Nice bit..

How financial advice distorts financial choices/decisions?

October 16, 2015

Luigi Guiso and Gabriele Foà have a nice piece on the topic.

They try and figure whether fianncial advice by experts is biased or unbiased.  The idea is pretty simple. If people are making decisions based on prices then advice is biased. However, if decisions are based on characteristics of firms, then it is unbiased:

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How internet is going to shape mutual fund investing?

October 12, 2015

Much of attention of technology in finance remains on banking. However, technology has played a much more significant role in shaping and changing capital markets. Right from trading to settling billions of transactions, it is being done is a jiffy and in a seamless manner. And then in investing too. One can just buy and sell financial securities in a much easier manner now (though this has made things riskier as well, but that is how it goes).

This piece by Dhirendra Kumar of Valueresearch is  on how internet could change mutual fund investing in future. It is a much slower process now which keeps the “app” generation away. Interestingly, this time it is not the regulator but the funds which have opted for the slower process:

Even as the digital revolution is transforming every kind of commerce, investing in mutual funds seems firmly stuck in the early years of internet-enablement. Think of a youthful new investor, used to downloading an app or opening a website and getting everything done within minutes. Such an investor would be surprised to discover that face-to-face, physical verification and even paper forms are still the modus operandi for investing in mutual funds.

This seems to be the case because under the Prevention of Money Laundering Scheme, the onus of positively identifying its own customers lies with each business independently. They take the view that it doesn’t matter if someone has been biometrically identified by Aadhar, and has had an in-person verification for a bank account linked to that Aadhaar!No mutual fund will let you invest without such a process, even if you have an Aadhaar number and a netbanking-enabled bank account linked to Aadhaar. The surprising thing is that if you have these two, then you can start a new National Pension System (NPS) account and begin investing in it through an entirely online process.

But in mutual funds, no such thing can be done. Recently, in an interview with Value Research’s Mutual Fund Insight, I asked SEBI Chief UK Sinha why this was the case. His answer was a surprising one. He said that such a thing was possible and had been so for a year. However, mutual funds choose not do so.

Similar issues were seen earlier as well:

My mind goes back to 1992, when the IPO of Master Gain, a closed-end fund from the then Unit Trust of India unexpectedly got 65 lakh applications. These were paper forms which people queued up to first buy and then deposit. Most banking, cheque clearing, record keeping statements, unit transfers etc were all obviously paper-based and manual. A significant chunk of investors had long-running issues because of faulty records, signature mismatches and other problems. I know because I was one of them.

Even at the time, it was obvious that complete computerisation and networking was the only way forward. And yet, if you had told me back in the day that fully networked and computerised access to autorickshaws would arrive before it would for mutual funds, it wouldn’t even have sounded like a good joke. However, I’m sure that these days will soon pass. The kind of push that is now coming from customers as well as regulators for end-to-end digital flow for investing means that it won’t be long before the change arrives. SEBI has set up a committee under Nandan Nilekani to lay out a roadmap on the issue, and RBI is apparently onboard for bank KYCs being valid. Sinha believes that we are heading for a quantum leap in the way people get digital access to fund investing.

What is needed is a unified way for investors to start and access fund through a single interface for all funds. Of course, like all such changes, this will be disruptive for many who are part of the process now. There will no doubt be disintermediation, and there will be a levelling of the playing field between big players and small. No doubt, the big players will not like it and will resist it in some way. That’s where both customer pressure and regulatory push will play a role. The potential of the pie becoming larger should surely be the bigger attraction than fighting over slices of a smaller pie.

The point about digital transactions is not that they should be not just possible but overwhelmingly more convenient and substantially cheaper. If that is true then usage will explode. The benefits that will come through are enormous. It should be easy and quick to learn about mutual fund investing, choose an investment and then transact with minimal friction. The democratisation of investing that can come through such access can have a transformative effect on the whole activity of investing.

For all you know some funds are already on the way as some commentators have pointed. SEBI continues to do things without making much noise..

Actually more than these supposed changes, we need good cheap internet connectivity and proper electricity to run the show.  In India’s app design city, we have neither of these two things..

Bill Gross to sue Pimco for ‘Hundreds of Millions’ over ouster..(another person of high finance has a high fall)

October 9, 2015

The ugliness of high finance world is being exposed each day since the 2008 crisis. it is shocking to see the standards all these priests of high finance.

The recent addition to the list is Bill Gross and his former colleagues at PIMCO:

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Now emerging market debt is emerging as a new risk..

October 8, 2015

First they say open up financial markets, move to full capital account convertibility etc., One of the advantages of this will be to allow domestic firms to borrow abroad, get cheaper funds, expertise an so on.

And now, we are hearing rising emerging market debt is the new risk. First is this IMF analysis in recent GFSR and second is this piece by bunch of econs.

IMF says:

Chapter 3 of the October 2015 Global Financial Stability Report studies the growing level of corporate debt in emerging markets, which quadrupled between 2004 and 2014. The chapter finds that global drivers have played an increasing role in leverage growth, bond issuance, and corporate spreads. Higher leverage has been associated with, on average, rising foreign currency exposures. The chapter also finds that despite weaker balance sheets, firms have managed to issue bonds at better terms as a result of favorable financial conditions. The greater role of global factors during a period when they have been exceptionally favorable suggests that emerging markets must prepare for the implications of global financial tightening.

The second piece says:

How negative interest rates mean redoing finance textbooks..

October 5, 2015

Prof JR Varma has a nice post on the topic.

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Six lessons from mobile money ventures in developing countries

October 5, 2015

HBS has a case on this. The key q is why do so many mobile money ventures fail?

In many emerging economies, the need to give people in poverty better access to financial services seems obvious. The mobile phone is a perfect vehicle, given their widespread adoption, even among the financially less well off. Designing a profitable solution for an unmet market need should be business strategy 101 for most entrepreneurs, so why have so many mobile money service offerings failed? 

It’s a question being studied by Rajiv Lal, the Stanley Roth, Sr. Professor of Retailing at Harvard Business School. “You would think mobile money should be a hands-down success all over the world,” Lal says. “But 80 to 90 percent of mobile money operations are failures.” 

His research shows that companies are starting their market analyses in the wrong places. “Mobile money does not solve the same problem for every country,” says Lal. “If you look at successful implementations, they all started with, ‘What problem can I solve?’ If you don’t identify the right problem, the rest of it will not go anywhere.”

Lal researched successful mobile money programs, and a few that flopped, to compile tips designed to help prospective operators—and perhaps entrepreneurs in other industries as well—take an educated shot at developing a winning service. He outlined his advice in a July working paper, Mobile Money Services—Design and Development for Financial Inclusion, co-written by HBS research associate Ishan Sachdev.

 What are the lessons?

  • Lesson 1: Work well with regulators
  • Lesson 2: Keep services free
  • Lesson 3: Get agents on board
  • Lesson 4: Make customer registration easy
  • Lesson 5: Earn consumer trust
  • Lesson 6: Keep products simple

Similar to standard lessons on banking as well..

 

Beware the Credit/GDP ratio as a measure of financial development

October 5, 2015

Thorsten Beck of Cass Business School has a piece on the topic. He paraphrases the Churchill quote on democracy:

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JP Morgan Fund does use side pockets idea..

September 16, 2015

This blog had pointed to a solution proposed by Prof JR Varma on its mutual fund mess. He had suggested that the fund should keep the bad asset away from its portfolio (in a side pocket). The fund could say business as usual based on the remaining value of the portfolio (which was about 95%).

The fund has decided to go ahead with this side pocket idea (not sure whether they read the idea). BS explains:

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Financial engineering versus cancer..

August 19, 2015

This is interesting short note. Financial engineering can cause cancer to the financial firm but could be useful for curing the cancer to humans.

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How many can pass this Prof. Milton Friedman’s exam on money and banking (1932)?

August 7, 2015

This blog had earlier pointed about a Harvard economics exam in 1953. Most reacted to the post wondering how many economics students and today’s economics pros can pass this exam today?

Similarly, Rear view mirror blog points through this post Prof Friedman’s exam on money and banking in 1932:

Write on any four questions.

  1. “The banks could either keep the demand for real capital within the limits set by the supply of savings or keep the price level steady; but they cannot perform both functions at once.” (Hayek) Discuss this statement critically
  2. “Only the purely static quantity theory needs no index number, for its comparisons assume relative prices to be unchanged inter se. The objections to Professor Fisher’s Equation of Exchange arise mainly from the faults of the price index implied in it.” (Hawtrey) Explain and evaluate this statement.
  3. The criticism is sometimes made of the quantity theory that it assumes other things to be equal, whereas in fact they are not. Discuss this criticism. What “other things” are referred to?
  4. Discuss the relation between the k of Keynes’ earlier equation and the velocity of circulation.
    b. Discuss the statement that changes in the velocity of circulation of goods cannot bring about changes in the price level because of the fact that they necessarily bring about compensating changes in the velocity of circulation of money.
  5.  According to Keynes’ analysis what would it be necessary to do in order to eliminate the business cycle? State and support your opinion of Keynes’ conclusion.

How many can pass this either? How many have even heard of these statements? Where is the equation/model here? It ain’t economics man!!

Greece, Goldman Sachs, and the dark side of international finance

July 30, 2015

Nice interview of Prof. Alexander Arapoglou of Kenan-Flagler Business School. He has worked as a financial trader and knows a thing about these games.

He points to how Greece fudged its accounts while entering Euro in 2001. Needless to say who advised the govt on the deal:

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IMF’s mistakes in Euro Crisis…

July 29, 2015

Much of the blame for EZ crisis has fallen on Europe and ECB policymakers. IMF which is usually a key party to such crisis has been ignored.

Nor surprisingly, IMF has retained its record of  worsening crisis in EZ case as well. Ngaire Woods of University of Oxford has a piece on the topic. IMF actually ignored six lessons this time:

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European policymakers learn nothing from 1930s depression years

July 27, 2015

Prof Brad Delong is surprised how Europe has forgotten lessons from its dreary past:

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Was India (and other developing economies) ignored in Bretton Woods talks?

July 27, 2015

That is the general perception. However, Prof Eric Helleiner of University of Waterloo does not think so. He says India infact contributed quite a bit to the thinking on BW institutions.

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The possible trinity of financial inclusion and the five kinds of financial illiterates..

July 23, 2015

SS Mundra of RBI speaks on financial inclusion and has some interesting insights.

He says unlike the impossible trinity of macroeconomics, here there is a possible trinity of inclusion:

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Guess who feels good about Greece?? Global investors..

July 22, 2015

The ones who bring trouble are also the ones who seem to be enjoying the most from Greece mess.

Matthew Winkler of Bloomberg has a story:

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Have banks become today’s tanks? Their attempted coup in Greece..

July 21, 2015

He reflects on the ongoing Greece crisis (for how long will it continue). He says how earlier tanks took over countries and now it is banks:

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Will computers replace human intelligence in finance?

July 16, 2015

Prof Shiller does not think so.

He says this vision of financial singularity where computers shall replace a fund manager and markets become super efficient is unlikely to happen:

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