Finance and Stuff

Thoughts on finance and other stuff by Johan Lindén

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Inflation? Deflation? Financiation?

So what has happened lately in finance? Where is all the money going?

Federal Banks all over the world have printed money in true Keynesian style to counteract a falling economy.

In Europe, the European Central Bank, lent banks half a trillion for a mere 1% interest. It is basically the same blues that has been sung for the last couple of years and it is still going strong. I guess it ain’t over until the fat lady sings.

So where is this money ending up and why does not price indexes for goods and services increase?

Well, because a few people in the financial sector is taking all this money and are making themselves very rich. Think of it, you pay 1% interest, and the inflation is around 2-3%. So by just avoiding losing money you will make money with this ingenious system created by politicians and bankers.

If the market would have set the interest instead of politicians, would it be as low as 1%? Is all risk really calculated in that 1%? Now that is a ridiculous thought!

Stocks vs. Long and Short-term Bonds

The relative performance of long and short-term bonds vs. the S&P500 index for the last 5 years.

As one can see, even short-term bonds, the safest theoretically assets one can buy, have outperformed the S&P500 stock index.

bond comparison stock index s&p500

The Skewed Risk-Reward Ratio

skewed risk reward ratioTo illustrate the problem of how skewed the risk-reward ratio of banks vs. consumers is you just have to look at today’s all time high in the yield gap between banks’ mortgage rates and the rates banks borrow from the central bank.

This increased yield gap will increase bank profits while at the same time increase the interest burden to the consumer side of the equation. As usual, the banks score another goal on the behalf of the consumers.

So, is it really a problem in a free market that one party wants increased compensation for the increased risk? No.

Unfortunately there is still no such thing as a free market, and it is highly doubtful that the banks should get compensation for increased risk, knowing that the public will take the fall in the event of a default situation.

That is a really skewed risk to reward ratio for banks and consumers, where the consumers have drawn the short straw. This is also referred to as asymmetric risk, which risk expert Nassim Taleb, among others, often warns about.

I do not know which word to choose, laughable or pathetic, when the new president of ECB, Mario Draghi, today said:

“Therefore […] banks should consider restraining dividends and ad hoc compensation to strengthen buffers.”

Please Draghi, if you want some respect, do not use the word “should” nor “consider” in when speaking about economics.

Free markets will always end up doing the right choices, but regulated markets are in the hand of a few politicians armed with only hypothesis in one of the most complex field of sciences called economics.

Note:
I have had some technical difficulties and have not been able to update the blog frequently the last few weeks, but problems are resolved and I am back and track.

Men Living With Their Parents and Financial Crises

In this diagram we see the correlation between men still living with their parents and their countries’ financial risk. Not fully sure about the causality though…

financial risk and men living at their parents

Libertarians vs. Occupy Wall Street

I wonderful diagram that shows the common traits among libertarians and the occupy wall street group. But also what differs the two groups of people.

One can really see what side has the best argument and solution. But both sides see that the current system is totally flawed to put it mildly. However, it will not work to replace a currently flawed system with another system that may even be worse.

I let you be the judge whose side has the best logics and solution the current political system.

occupy wall street libertarians socialistsPicture from: GreaterBostonTeaParty.com

Gold Weekly Buy Signal

Gold finished last week bullish and gave a buy signal in the weekly chart.

I call this signal “Buy The Dip” and it gives us a good buying point. But no buying signal is ever good without a proper exit strategy. But if you are being long-term bullish on gold like I am, you should widen that stop loss. So please remember to always define your exit signal before you take on a trade or investment.

A wider stop loss means you also need to take a smaller position on your trade. But I hope most readers already have gold in their long-term portfolio as insurance as I have written about before.

The last local low point was $1,535 so that will be my stop loss unless sentiment changes.

[Edit: Added the following paragraph on Nov 1st]

Mark Hulbert who is tracking sentiment in his Financial Digest wrote on the 25th of October that “[…] gold market exposure among the short-term gold market timers […] dropped to its lowest level in two and one-half years — minus 13%.” This will really help to give the positive signal above a kick-start.

gold buy signal chart buy the dip

NASDAQ 2% Below Ten Year High

Just an interesting note: NASDAQ 100 is only 2% below its ten-year high now. How many years ago was it that we reached the 10 year high last time? Actually it was this summer. I guess that, intuitively, this is not what most people would guess.

nasdaq qqq 10 year high

A Quick Look at the Stock Market

A quick look at a chart of the stock market movement since the October bottom. Annotations provided in the chart. Feel free to leave a comment!

stock market  contrarian rally

The Common Denominator why both Left and Right-wing Activists Occupy Wall Street

The Common Denominator which brings both Left and Right-wing Activists to Occupy Wall Street.

left right politics libertarian socialism occupy wall street

… too much government. Which ironically boils down to be only a socialistic problem. So come on socialists, think again.

As an added bonus also check out this next cartoon:

government bailout banks

Symmetry in Compensation – Occupy Wall Street

Nassim Talab claims that the reason for the demonstrations on Wall Street is about asymmetry in compensation. Thus to fix this problem we need symmetry in compensation.

Symmetry in compensation basically means that the upside for bankers on Wall Street, the rewards, should equal the risk for losses. What we have seen so far is that bankers have made million dollar bonuses, and they still are, but when screwing up they get bailed out by the tax payers.

Here is the video by, Nassim Taleb, one of the most important persons of the century:

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