Archive for the ‘Financial Markets/ Finance’ Category

Look behind the scenes of the world’s biggest mutual fund

August 17, 2016

A nice story of the world’s biggest Mutual Fund – Vanguard’s Total Stock Market Index Fund – and its low profile fund manager – Gerry O’Reilly. He manages the $450 billion fund!

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How Central banks moved from fiscal dominance to financial dominance..

August 16, 2016

Daniela Gabor of University of the West of England has a nice paper on political economy of repo markets.

The summary of the paper is here. She explains how we move from one crisis to another in macro/monetary policy. Emergence of Repo was seen as an end to fiscal dominance. But it triggered a new problem of financial dominance:

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Using prospect theory to figure today’s monetary policy and its impact on markets..

August 12, 2016

Prof Jayant Varma of IIM Ahmedabad has a nice post which gets to the crux of the negative interest rate issue.

He says as bonds have negative rates, the concept of yield/coupon etc is lost. So, investors are looking at bonds in terms of prices alone just like stocks. Whereas, investors are looking at stocks as bonds as they give dividends. So bonds are the new equities and equities are the new bonds.

This is like the prospect theory applying in monetary policy as risk averse bond investors are seeking risks in wake of losses:

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Building a balance sheet of a sandwich seller and then lending him a loan..

August 11, 2016

This is a superb tale from Kshama Fernandes of IFMR.

She narrates how an IFMR executive built a balance sheet of a sandwich seller and gave him a loan:

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Debate between efficient finance school and behavioral finance school…

August 9, 2016

The two leaders of both the schools – Profs. Eugene Fama and Richard Thaler – debate over financial markets (HT MR blog) .

Nice bit..

The Warren Buffet economy: How Central Bank enabled financialization divided America

August 9, 2016

David Stockman points to this amazing figures on rise in wealth of a few and inequality for others:

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How the crisis of 1772 shaped change in Wealth of Nations…

August 4, 2016

Supposed father of economics, Adam Smith also had to go through an economic crisis to shape and change his views about banking.

Tyler Godspeed has a piece on the same. Starts with Hume writing to Smith:

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Financialization and its discontents

August 4, 2016

This is an interesting philosophical piece by Prof. Perry Mehrling. He says both financialisation and discontent with it are hardly new.

Just that we get mixed up in our understanding of money and credit. We like money for some of its features and credit for some other features. But in the discontent we just focus on money and not credit:

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How will digital currency shape the future of banking and monetary policy?

July 27, 2016

Marilyne Tolle of BoE discusses the several issues with respect to digital currency in Bank of England’s blog.

There is little doubt that these currencies as they gain ground could pull the carpet under the central banks monopolist chair. Central bankers who are habitual to tell the politicians and businesses about allowing disruptive innovations are going to get a bit on their game as well. More than anything else, it will be interesting whether central banks try and preserve their monopolies or let it go.

Tolle says digitial currencies will create problems for both banks and central banks. One key reason is the payment bit is going to get divorced from the deposits:

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Is Greed Ruining Private Equity Firms?

July 21, 2016

It always looked like but no one cared. Gordon Gekko argued along ago greed is good and has remained a dictum for the financial sector.

Now a new research by Profs Victoria Ivashina and Josh Lerner of HBS shows greed rules Private Equity firms. Here is a discussion of the same:

In a first-ever look at the internal economics driving private equity partnerships, Harvard Business School researchers have found that many of these funds can be torn apart by greed among founding partners who take home a much bigger share of profits than other senior partners, even when their performance doesn’t merit higher rewards.

This creates a ripple effect, where other senior partners become resentful, disenchanted, and leave their jobs, causing instability that spooks potential investors and could lead to a firm’s collapse. This pattern of unequal pay was much more extensive than anticipated among the 717 private equity partnerships studied by HBS finance professor Victoria Ivashina and Josh Lerner, the Jacob H. Schiff Professor of Investment Banking.

These rifts, far from being uncommon, are the average experience in PE partnerships, Ivashina says.

In their working paper released in March, Pay Now or Pay Later? The Economics within the Private Equity Partnership, she and Lerner found that a partner’s pay was often tied more to the person’s status than to performance. Previous success as an investor seemed to have little bearing on how much the partner earned. Founders in particular gobbled up a much bigger piece of the pie.

Senior partners who believe they aren’t compensated fairly are significantly more likely to leave a firm. These departures can give limited partners the impression that a private equity firm is unstable. That perception creates a wariness to invest, which means a PE firm often struggles in its attempts to raise the next fund.

So in essence, founding partners are damaging their own firms, in some cases beyond repair, by being greedy.

One still needs research to prove the obvious..

Why money multiplier remains low in US – the micrcoeconomics of banking..

July 20, 2016

Julien Noizet of Spontaneous Finance has a piece on he topic.

The money multiplier has been really low in US for sometime now. Most imagined that with the Fed pumping so much money multiplier will jump significantly and we would have hyperinflation etc. But none of this happened. Why? In most such monetary thinking, we just ignore the functioning of the banking sector. Just like all sectors, banking too has its microeconomics and rigidities:

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Why and when did the Treasury embrace regular and predictable issuance?

July 14, 2016

In this interview, Garbade explains how govt started predictable debt issuances. What is debt issuance? Well, govt issues bonds to meet its expenses. One way to borrow is whenever govt is short of funds, it announces it will borrow via so and so bond. This is the unpredictable bit which will create problems in markets. Govt is the prime borrower and any such sudden announcement will lead to scrapping of funds. If the market is facing crunch it will lead to higher interest rate for the govt itself.

A better way is that the govt forecasts its borrowing well in advance based on estimate of its income and expenses. It then uses the borrowing figure to work out a predictable calendar of borrowing in the coming quarters/years. This way market is well prepared to work out the funds available and plan accordingly.

But how did this thinking on predictable issuance start in US? This is what Garbade tells us:

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Perceiving and managing business risks: differences between entrepreneurs and bankers

July 13, 2016

I have always wondered what differentiates the two –  entrepreneur and banker.

Here is an interesting paper by D.K. Sarasvathy, , Herbert A. Simon and Lester Lave which point to probable differences:

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Do MBA programs drive inequality?

July 11, 2016

Kynn Parramore has a piece in Evonomics:

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Welcome To Hell – Central Banking At Work In Brazil and Beyond

July 7, 2016

But Lula’s term was anything but that. Brazil made major inroads in Global Economy Prospects. It is part of BRIC club, hosting both Olympics and World Cup Football etc.

How to become a Bubble Finance Trader

July 4, 2016

The last thing one would like to put on this blog is tips to make money in stocks etc. But this bit from David Stockman is interesting. He is a big critic of today’s macro policies. He is one of those Washington insiders who has become a big critic of the nexus of Wall Street and Washington.

So, now he sees a big bust in US economy and has designed a trading program to help make money of this upcoming mess:

Dear reader,

Now that the Federal Reserve has raised interest rates, we’ve reached a major turning point. One that will change the course of financial markets. That’s why David believes it’s urgent you take action now. In short, we’re facing the end of what David calls “The bubble finance era.” That means…

  • Most popular income plays will be crushed…
  • People will lose their jobs as the economy enters recession…
  • The housing market will plunge again as mortgage rates head higher…
  • The stock market will crash…
  • Oil and commodity prices will plummet…
  • An unprecedented deflation will sweep across the global economy…
  • Causing widespread defaults and bankruptcies…
  • And much, much more.

But David doesn’t believe that means you have to suffer. In fact, he believe this one of the best times for you to make money. And we’re confident his Bubble Finance Trading strategy is the best way for you to do it. And remember, the most lucrative gains are still to come as the Federal Reserve continues to raise interest rates.

We’ve done all the hard work for you. David has made the bubble finance trading strategy as simple as possible, saving you time and energy.

Well that is some in your face marketing telling how to make money when the world is crashing…

Case of IMF’s wolf: no cry in 2006 and many cries in 2016

June 23, 2016

Howard Davies has a scathing piece on IMF and its forecasting abilities. Like a wolf it does not cry when there are expected fears (as in 2006) and cries when there are fears which apparently are not as much (as in 2016). Despite, repated such articles, IMF continues to catch our imagination. A job at IMF is almost a prerequisite to get a govt/central bank job in developing countries. He/She was at IMF after all is all that needs to be said..

Coming to the article, he picks on Apr 2006 report:

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Rising finocracy concerns in Sri Lanka too!

June 22, 2016

An editor friend at Daily Mirror, Sri Lanka found the finocracy post interesting and relevant to SL.  Just like India, In Sri Lanka the term of the central bank governor is going to be over and there is lot of talk whether there will be reappointment or not.  Though, nothing really can surpass the noise and nuisance like India.

So he put up the post in the SL paper as well.

Didn’t realize that this arbitrarily created term  finocracy will strike chords across the shores as well..

Isn’t finocracy as big a case for crony capitalism?

June 22, 2016

The recent spate of events in India led to all kinds of fear mongering with most of it proven wrong. The finocracy had to soon lick their wounds but has not given the space completely. The articles keep coming over what India has lost which have no substance but mostly rhetoric. It is a pity to see such low standards from fairly eminent people. Is Indian economy just about one person?

Of all the articles this one on crony capitalism winning was both amusing and frustrating at the same time. These days crony capitalism has become the buzzword for all ills facing an economy. So let us define what it is.  Wikipedia defines it as:

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How SEBI and FMC’s merger took a dozen years…

June 22, 2016

Superb article by Shaji Vikraman of Indian Express (HT Ajay Shah Blog).

How obvious things take so much time in India:

At an internal meeting in the Department of Economic Affairs in 2002, senior officials were discussing financial market reforms that could potentially follow the good deal of work done on the equity markets front starting from the mid-1990s. Finance Minister Jaswant Singh, who had moved into the Ministry from the External Affairs Ministry that year, was briefed by officials led by Finance Secretary S Narayan on the missing piece in the reforms process: integrating the separate equities and commodities segments of the financial markets. Singh was told that virtually no country had a fragmented market like India with one regulator supervising both segments of the market, except the US where again one regulator had oversight on spot markets, and another for the derivatives segment.

The rationale for a similar integration in India that was put forward was that fragmentation had an impact on costs, economies of scale, and the fact that brokers, investors and other participants were virtually the same. There was also the argument of the capacity of the regulator — in this case the Forward Markets Commission or FMC, which was not an independent regulator — being just an arm of the Department of Consumer Affairs, and without adequate capacity and resources to supervise a growing market segment. S Narayan and Wajahat Habibullah, Secretary in the Department of Consumer Affairs, then discussed this.

In May 2003, Singh wrote to his Cabinet colleague in charge of the Department of Consumer Affairs, Food and Public Distribution, Shanta Kumar, sounding him out on the idea of a convergence of markets, institutions and players in the backdrop of the major changes that were taking place in the Indian securities, and the commodity derivatives markets. That’s when an inter-ministerial group was formed to consider whether India should have a new regulatory architecture related to the financial markets.

A committee headed by Habibullah in its report of September 2003 suggested the possible merger of FMC with SEBI, saying the structure of the FMC, which was formed in 1953, was not fully suited to the challenges of an emerging market and needed to be overhauled. Options outlined by the committee included a unified entity brought about by a merger of SEBI and FMC with two separate divisions to regulate securities and commodities markets.

The committee also said that the Department of Economic Affairs was better equipped to handle this, as it dealt with the securities market — a rare instance of a government department showing a willingness to cede turf. But this would mean a change in business rules by the Cabinet to transfer the administrative responsibility of the FMC from the Ministry of Consumer Affairs to the Finance Ministry. A senior official in Consumer Affairs was assigned the job of working out the operational details of a potential merger, and the roadmap.

The plans of the NDA government went awry with defeat in the May 2004 polls….

Post 2004, the coalition politics took over and the issue was buried. It was revisited and completed only when the same party came which worked on it came to power..

The UPA government decided to pursue the proposal, however, and Finance Minister PChidambaram announced in the July 2004 Budget the decision to take steps to integrate the commodities market with the securities market as part of the initiative to make capital markets strong and attractive. But soon afterward, the proposal ran into huge resistance from Agriculture Minister Sharad Pawar who, at a meeting with the Finance Minister and other officials, made it clear that he thought the time wasn’t opportune. Given the challenge of countering a powerful minister like Pawar, Prime Minister Manmohan Singh asked C Rangarajan, who headed the Prime Minister’s Economic Advisory Council (PMEAC), to suggest a solution.

Rangarajan recommended that status quo should prevail, and the proposal for a unified regulator should be reviewed after three years. Which meant that the FMC would continue to report to the Department of Consumer Affairs. Over the next few years, volumes in the commodities market rose, attracting the attention of many players and investors. But even after three years passed, there wasn’t material difference.

The first trigger for change came in 2011, when during the Cabinet reshuffle, Pawar’s portfolio of Consumer Affairs was handed to a Minister with Independent Charge. The push came a little later, when the NSEL scam hit the headlines, exposing the manipulation in the commodities market, and the associated regulatory inadequacies.

By 2013, the Prime Minister had brought P Chidambaram back to the Finance Ministry and, that September, a decision was taken to transfer the administrative responsibilities relating to the commodities market to the Finance Ministry. Well before that, a committee on the financial sector headed by Justice Srikrishna too had recommended an unified regulator, subsuming the FMC into SEBI, which it said should oversee all financial markets — bonds, equities, commodities, insurance and pensions.

The final merger of FMC and SEBI came when Finance Minister Arun Jaitley announced it in his 2015 Budget. And though a grand plan worked out by the Finance Ministry during Secretary Rajiv Mehrishi’s time to ensure the transfer of the public debt management function from the RBI to the government, regulation of the bond markets by SEBI, and a unified regulator for commodities and equities through the Finance Bill, didn’t quite work out, the merger did happen. SEBI Chairman U K Sinha and FMC Chairman Ramesh Abhishek and their teams then worked on the last mile implementation, with a formal merger coming through in September 2015, 12 years after it was first proposed — a reflection both of the pace at which some of these changes happen, as well as of continuity.

Superb reading all the way.

These aspects of economics and finance are barely taught or discussed anywhere. If SEBI has been a silent performer, FMC is nowhere in the picture. The blogger recalls hearing FMC’s chairperson earlier who pointed on how they operated without any staff at all and keep getting inferior treatment from the polity but they kept doing its work.

How do we look at the institutional design of capital and commodity markets? The two baskets are inherently different given how each commodity has its own cycle. We always had trading in these markets historically but was more local and commodity specific. As things moved to exchanges we started to see different commodities influencing each other. Then with non-commodity players like banks etc entering the commodity market as well treating as an investment basket, the commodity market also began to be influenced by capital markets and vice-versa. A sudden failure of a crop/commodity led to volatility in not just the commodity market but also in stocks linked to the commodities as well.

This ongoing synergy required the commodity and capital market regulation space to be synergised as well. So the discussion which started 12 years ago has finally seen its completionall behind the scenes. If similar merger was done by the big brother we would be sick of reading it. But there is hardly anything on this which is quite important in its own ways.

Infact given how the global crisis has shows why all things moving together is dangerous, we should question the ongoing synergisation between commodity and capital markets. Perhaps we should look at continued dangers of such integration.

More research and discussion is needed on this fascinating topic..