Martin Wolf writes an interesting piece on companies.
He reviews all the basic ideas regarding what a company is and what it is expected to do:
How times have changed. Earlier any mention of markets automatically meant it is real and good for the people. Not anymore.
Mark Carney of BoE (while releasing the Bank’s Fair and Effective Markets Review Releases Final Report) says we need to build such markets:
From the coffee houses that served as meeting places for entrepreneurs and merchants; to the exchanges that supported the trading of financial claims; to a central bank that acted as lender of last resort: a rich infrastructure developed to support markets that served the UK and the world. As it grew into the world’s leading economic and trading power, the UK also became its centre of financial capitalism.
It is really surprising to see such reflections. For all you know, BoE and London were seen as the benchmarks for anything in finance.
What are real markets?
There was a time when Mario Draghi was the most celebrated central banker of the world. His famous words “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough” stirred European markets like nothing else could. Suddenly markets jumped and ECB ended up lowering yields without spending a penny. This was in 2012 and 2013 leading to several awards for the central banker.
And now we are in 2015, The same news sites which celebrated Draghi are wondering whether the central banker has lost his touch. One’s luck in central banking can only stretch so far. It is the usual story. The awards should instead be titled as the luckiest central banker of the year. Those central banks who claim that they are not cheerleaders of markets are living in utopia. The success of a central banker is just dependent on how markets perceive and cheer the monopolist leader. Most of these awards anyways are usually sponsored by the financial street directly or indirectly.
On to Draghi:
Finance Professors have been ignorant of the practices in the financial industry for years. Like magicians they have only shown us the bright side of their occupation. It required a crisis like in 2008 to break all these myths of a well functioning efficient market mechanism. All doyens of financial industry were seen indulging in practices which make all the previous money making frauds and tricks look so lame in comparison.
But then guess what? The aura of the industry and its soothsayers has not just remained but increased manifold. It is a classic case of bad behaviour continuing to be rewarded by the society. For instance this story of a young person really excited on getting a job offer from one of the doyens only to end in a really bad tragedy.
So such posts comparing the sector to a parasite is interesting to read:
Stan Fisher sums up the lessons he has learnt over the years.
He misses the most important lesson – know the financial history and know it really well. Infact history is not even a word in the speech. Infact, if one follows history then you are unlikely to hype certain phases of economic and stock market growth as a new dawn or something. And then as the crisis enfolds, you know what you have to do. After all, there is nothing unique about having a crisis. History keeps you humble and grounded.
Another thing is how despite likes of Prof. Fisher wanting to be seen as market promoting economists, actually just talk about government and central bank interventions. These evry interventions end up sowing the seeds of the next crisis.
This is an interesting development.
JP Morgan has mined tons of data on its customers and now trying to get insights from various patterns:
What if banks could tap into their vast network of consumer and business accounts to ferret out signals about where the economy is headed?
J.P. Morgan Chase is doing just that with the launch of a new institute that uses “big data”in analyzing hundreds of thousands of accounts for clues about income and spending patterns. The institute’s first report, released Wednesday, offers a deep dive into consumer finances and shows that income and spending remains volatile for the broad middle class, not just the poor.
Researchers tracked the spending and income patterns of 100,000 randomly selected individuals from a sample of 2.5 million accounts at the bank over a 27-month period ended last December. Among its findings: While two in five individuals saw their income vary by at least 30% from one month to another, three out of five individuals saw their spending vary by at least 30%.
The potential dividends from building this data asset aren’t lost on Diana Farrell, the institute’s chief executive. She learned first-hand about the need for real-time information about household financial behavior as a top economic adviser to President Barack Obama in 2009 and 2010.
“I can’t tell you how frightening it was to be in the middle of the debacle of the recession and not have a good understanding of what was happening in the household sector,” she said. “We were just starving for real-time information.”
J.P. Morgan plans to build out its dataset so that it can look back historically, she said. The analyses of account data, which are stripped of any identifying information for bank customers, could help give insight into what Americans did last fall with their gasoline savings, for example.
Other findings from the institute’s first run through its data lab:
Monday is the top spending day of the week and Sunday is the lowest. Americans spend three times as much on a Monday as they do on Sunday.
Excluding Tax Day, the single biggest day for consumer spending last year fell on March 3, the Monday that followed the single highest earning day of the year, Feb. 28.
The top 12 days for spending at restaurants and bars fell between Feb. 14 and May 11.
Ms. Farrell said it isn’t yet clear how to explain some of those statistics, so stay tuned.
Monday the highest spending day and Sunday the lowest. That is strange. One would imagine max spending on Sat and Sun. Monday is a sad day for most and may be people spend the most to get rid of sadness on that day..
Personally, I think IDFC was made into a bank a wee bit too early. Given how China and even India is pushing new development financial institutions to fund infra, we might have to soon look at domestic front too. We actually might need a few more IDFCs in future. Anyways, nothing can be done now. In finance, we have to go in circles and keep pulling out old wine in new bottle.
In this interview, IDFC chief Rajiv Lall explains how the transition is happening. Interestingly, the bank starts big from MP of all places:
Finance Textbooks tell you over and over again how opening of financial markets lead to resources going to the small and needy. The companies get listed and how foreign capital helps these companies get access to capital and grow. Right. Wrong.
This analysis shows just about 4% of companies received nearly 80% of FII flows since 2010:
The rising yields have dampened the sentiment among investors. According to issue arrangers, Steel Authority of India (SAIL) and GIC Housing Finance are among companies that were planning to raise funds through private placement of bonds but have deferred the issuances after seeing the response. The yield on the 10-year benchmark government bond has hardened by 19 basis points in the last two weeks in line with global debt market yields, over concerns of rising oil prices. A weaker rupee and foreign fund outflows from the domestic share and debt markets have also been hurting.
“Due to the recent volatility of markets and upsurge in yields, companies are postponing their bond issuances. The appetite of investors has got impacted. GIC Housing Finance and SAIL postponed their issuances. Both were planning to raise three-year paper but they found the bid levels high for raising funds,” said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities.
Similar trends are seen across some countries as well. Of all countries, Germnay has seen a jump in yields. The article says how stability breeds instability:
Central banks are getting a painful lesson in how their efforts to stabilize markets and boost their economies can, occasionally, do the opposite. The latest example is the brutal selloff in the German bond market. Yields on the 10-year German government bond, or “bund,” hit 0.67% Tuesday, up more than half a percentage point in just three weeks.
It’s hard to pinpoint a fundamental factor driving this. Yes, the European economy is doing better than expected, and Greece has, for now, avoided default or an exit from the euro as it wrangles further with its creditors over the terms of its bailout. Both factors have attenuated the “flight to safety” that made bunds so attractive.
But the main driving factor driving yields up is more technical than fundamental, and is in a strange way the result of central banks’ success in pushing yields down. Those efforts have led investors and traders to take on bigger positions, according to strategists atJ.P. Morgan. But when prices start to move against them, they respond by shrinking their positions, which can accelerate the movement in prices.
This is not the first time it’s happened. Last October, it was Treasurys, whose yields shot from 1.865% to 2.15% in a single day and eventually climbed to 2.4%. In the spring of 2013, something similar happened to Japanese government bonds.
What all three had in common, according to Nikolaos Panigirtzoglou and his colleagues at J.P. Morgan, is that all were driven by investors and traders using a risk management technique called “value at risk” (or VaR) that causes them to take on larger positions when volatility is low, because the steep price swings that inflict large losses are less likely.
Central banks have bought massive amounts of government bonds and used forward guidance to reassure investors that interest rates will remain near zero for a long time to come, a strategy aimed at lowering the cost of credit, encouraging investors and businesses to invest more, and raise inflation, which is now too low.
In the process, they have taken much of the guess work out of interest rates in recent years, causing bond market volatility to collapse. In that environment, VaR encourages traders to take on ever large positions. Markets are now heavily populated by VaR-sensitive investors: hedge funds, mutual fund managers, dealers and banks.When volatility ticks up, VaR also prods them to unwind those positions to avoid big losses, causing volatility to spike higher.
These movements are further exaggerated by the decline in bond market liquidity, i.e. the lack of dealers willing to take the other side of a client’s trade, due to a variety of structural and temporary factors. For example, dealers routinely “borrow” bonds from long-term holders such as insurance companies to facilitate their transactions. But German investors have become increasingly reluctant to lend out their precious bunds. Liquidity has been a particular problem for the futures contract on the 30-year bund, J.P. Morgan says.
“This volatility induced position cutting becomes self- reinforcing until yields reach a level that induces the participation of VaR-insensitive investors, such as pension funds, insurance companies or households,” Mr. Panigirtzoglou and his colleagues write. They refer to these episodes as “VaR shocks.”
VaR’s limitations are well known. By design it excludes or downplays rare episodes of extreme volatility. It is meant as a risk management tool, not a robotic buy or sell device. Yet VaR mimics the limitations of our own brains, which have trouble assuming circumstances that are at odds with those we have recently lived through.
Decades ago the late economist Hyman Minsky identified a similar phenomenon in the broader economy. A long period of steady growth with low inflation can persuade firms, workers and investors that recessions and crises are a thing of the past, and take on more risk as a result, for example by buying overvalued assets with debt.
“Stability is destabilizing,” Mr. Minsky said. He didn’t survive to see that prediction come true with a vengeance in 2008, an event Paul McCulley, then of Pimco, dubbed a “Minsky moment.”
Thus, in a larger sense, central banks’ efforts to hold down bond yields suffer from a similar shortcoming to their much bigger efforts to stabilize the economy, hold inflation low, and maximize employment. The more successful they are, the more they plant the seeds for a reversal of that success.
This is not a reason to abandon those efforts, because most of the time, they succeed (and are, in any event, better than the alternative, which is to do nothing). It is a reason to be aware of their limitations.
It also means central bankers need to be careful before assuming that market prices reflect fundamental developments. Many saw the big drop in German bond yields until mid-April as a ringing affirmation of the success of the European Central Bank’s bond-buying program. Similarly, some will see the recent selloff as evidence of failure. Neither sentiment is true.
Most of the time central banks only go wrong. The hubris they show over their control over economy only leads to huge failures later on. You keep going back to Austrians who have deplored all this rise of central banking and their interventions in economy..
Sashi Sivramkrishna of NMIMS (Bengaluru) has written a much needed piece. Slightly late as Budget hype is over but nevertheless.
It says Budget should be about governance and other issues. Fiscal Deficit is an outcome dependent on many factors and is not really in control of the govt. All this obsession only leads to fiscal gimmikry as finance minister only tries to meet the target and ignores the rest.
Nations, unlike households, do not face budget constraints. Fiscal defi cit targets therefore cannot be the objective of macroeconomic policy. Instead, budget discussions must focus on governance, supply-side bottlenecks and on policies to raise aggregate demand.
….It is time that the Indian government recognises the immense policy space available to it as a sovereign nation and does not succumb to unnecessary constraints imposed on it by rating agencies and media hype. So why are myths about the need to balance budgets propagated by the economics community? One possible answer is what Samuelson once mentioned to Mark Blaug:
I think there is an element of truth in the view that the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked [that] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and ineffi ciency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in away that the long-run civilised life requires (qtd in Wray 2010).
This obsession over fiscal and inflation targets has all become so stupid really. It seems nothing else matters. Just like the west, we have moved macroeconomics to just these two numbers and two institutions (fin min and central bank) which has made us miss many a things.
It is interesting to read such articles/talks on finance. Earlier it was assumed anything to do with finance was deemed good for society. Just keep bringing more and more of it. Post-2008, things have changed and has shocked many a people.
Prof Anat Admati of Stanford reflects on this change in finance and her own thinking:
I am a Finance academic. Before the financial crisis, I did research on financial markets and contracts, most recently on corporate governance. I taught finance to future managers and entrepreneurs. Before immersing in the technical details of valuing stocks, bonds, derivatives and companies, I always told my students that the financial system is really useful for society because it helps move money across time, allocate risks, and fund productive investments.
My life changed starting end of 2008. Fortunately for me, I didn’t lose my job or my house. I still do research in finance, currently on the forces that shape corporate funding decisions and how they can lead to excessive use of debt and great inefficiencies. But I am no longer in the silo I occupied and I talk to many more people both in other academic fields and outside academia. I teach a course entitled, like this conference, Finance and Society, which draws from multiple fields, including finance, economics, accounting, law, and political science. Even psychology, philosophy and sociology can bring insights.
What changed my life was seeing bad research and false or misleading claims, including from academics, affecting policy. Innocent people, powerless and often ignorant of the issues, are harmed by bad policies.
I assumed that at least academics and policymakers would welcome engagement so we can get the policy right, but I was wrong. People don’t want to engage when what you say challenges their viewpoint or actions. They may ignore and evade. I’ve witnessed not only blind spots, but what Margaret Heffernan writes about, willful blindness.
I had to step out of my silo and question my assumptions to understand better what is going on. I urge you to do the same. You can’t understand Finance and Society from any one silo.
Governance problems, when someone has control over decisions while others are impacted but don’t have enough control, are everywhere. If people can benefit at the expense of others, without facing any negative consequences, they often do just that. If people find it convenient to say false or misleading things (which they might even believe to be true) without being challenged, they often do that. If people can stay silent even if they know harm is done, they often do that, especially when staying silent pays and speaking up is personally inconvenient or worse.
Apart from this even the aura around finance should have declined but it has only grown. Finance professors continue to hog limelights and get fancy awards/positions based on their research (with much of it irrelevant) done before the crisis.
Well, you get what you sow. Before the crisis there was tremendous hubris around what finance and monetary policy can do. The whole thing was to just deregulate finance and let central banks be free from govt (and be slave to finance). As both collapsed, they are all out to blame each other. The econ models may show one factor ruling over other (as is the case in this article), but we know such models have limitations. Just change a few equations and results could be very different.
I was reading this recent post on capital flows from IMF in frontier economies. I assumed frontier economies to be another name for emerging economies. But no, it is a different class as explained here:
There is a group of fast-growing low-income countries that are attracting international investor interest—frontier economies. Understanding who they are, how they are different, and how they have moved themselves to the frontier matters for the global economy because they combine huge potential with big risks.
Get to know them
The first thing to note is that some of these countries already have moved to the lower-middle income group. While a working definition of frontier economies is subject to further discussion, broadly speaking, these countries have been deepening their financial markets, such as Bangladesh, Kenya, Nigeria, Mozambique, and Vietnam.
Some also have been able to tap the international capital markets, such as Bolivia, Ghana, Honduras, Mongolia, Nigeria, Senegal, Tanzania, Vietnam, and Zambia. Their markets are, however, not as deep and liquid as those of the emerging markets, but compared to the latter, they offer higher returns and the benefits of a diversified portfolio.
Really? Another buzzword called frontier economies. IMF is another champion in all these naming gaming and creating buzzwords.
Many frontier countries are growing at a fast pace, in most cases helped by sustained efforts to achieve macroeconomic stability, and by building business-friendly institutions ( Chart 1). These economies have also made significant efforts to lower inflation through prudent fiscal and monetary policy ( Chart 2).
Most of these countries have made progress in strengthening their policy making apparatus, reducing excessive red tape and lowering trade restrictions. Reforms to change their economic structure have helped them unlock their potential, including greater weight on the services sector, such as in Tanzania and Kenya.
In many countries, alleviation of their debt burden over the past decade has freed up money for investments in physical and human capital. Several countries received debt relief under the Highly Indebted Poor Country Initiative, but others reduced their debt outside this initiative, such as Kenya, Mongolia, Nigeria, and Vietnam.
These countries have deepened their financial markets at a fast pace—they offer more domestic financial services and products than their peers. Some have attracted international investor interest in their domestic bonds market and several have issued sovereign bonds in the international capital markets ( Chart 3).
Access to international capital markets means these countries can attract financing to address gaps in infrastructure, such as roads and railways, which could provide further impetus to growth. But as described below, market access also poses new financial risks that countries need to carefully manage.
Influences from outside their borders
Low interest rates combined with advanced economies shedding debt have pushed investors to search for higher returns on their investments, which has expanded their interest to invest in frontier economies.
The quest for resources by emerging economies has contributed to improved terms of trade and a surge in both domestic and foreign investment in resource-rich countries, such as Bolivia, Ghana, Nigeria, and Mongolia.
Domestic public investment has increased as the low debt burden, favorable external borrowing rates, and high commodity prices have increased access to private financing sources outside their borders.
Just another group of countries which have shown some recent promise. And all these are countries which soon are called lost ones as well..