Finance and Stuff

Thoughts on finance and other stuff by Johan Lindén

Tag: finance

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:

Creating Something out of Nothing – The Story of our Monetary System

Today our guest blogger, Carl Norberg, gives his view on the current monetary system and why this system has always been doomed to fail.

What is the common denominator for the financial, ecological and social crisis? All these crises are now accelerating caused by a dysfunctional monetary system, or more popularly expressed, the financial system.

The basis for why it continually becomes more difficult to deal with these crises lies in the very foundation of our financial system, the way money is created and derives its value. In order to create sustainable capitalism an unconditionally sustainable monetary system is needed. This is because the intrinsic logic behind a monetary system controls all other economic decisions.

It controls if there is a short-term and unsustainable economic growth that benefit but a few individuals or a long-term sustainable economic growth that benefits the whole society.

Bush & Greenspan - Experts on Economy

One Expert Giving a medal to another Expert

The monetary process is difficult to understand for many, even for experts (see picture). The process of how banks create money is so irrational that it almost is repulsive for our way to reason.

Seemingly though, it appears as if we borrow something very valuable from the banks (money) and we are therefore more than willing to pledge something valuable in return, we even pledge to give a part of our future earnings and our possessions (assets) in the case of if we do not pay. But in reality, the relationship is just the opposite. We get something from the bank which is basically completely worthless (figures in an account or coloured paper) and it is we as borrowers who have to cover or fill these worthless digits with any value, namely the promise of performance. Money is thus created in a completely different way than most people think.

The bank has only received power from the state to create money through credit lending. Therefore, today’s money is called “debt money” or “Fiat money”. The Bible says that God created light out of nothing but the power of his words. He said: “Fiat lux” (Let there be light). Fiat money is also created from “nothing”, but their value is created through a social construction, where we cover up the “nothing” with a debt recognition and a performance promise.

Debt Money was out of this first called “Protestant” money, since they got their legitimacy through the formation of central banks in Protestant countries such as Sweden (1668) and England (1688). There is thus a religious background to today’s non-rational monetary system. The confession and the trade of guilt was a Catholic mission. Within Protestantism the trade of debt or guilt became an internalized settlement between the individual and God. The creation of money through debt recognition therefore appears like a “natural” psychological step for a guilty Protestant. Today’s money is basically based on a secular faith, nothing else. It only exists because we believe in an illusionistic, but internalized guilt. [Editors note: In Sanskrit, Hebrew, Aramaic, ‘‘debt,’’ ‘‘guilt,’’ and ‘‘sin’’ are actually the same word.]

The right to create money has previously always been confined to a state’s sovereignty. Today that right belongs to the private banks.

The ability to create money “out of nothing” is the modern industrialized world’s foundation. It really is an impressive illusionary masterpiece that requires some respect. Since we would not have the society of today and it would also have been impossible to understand it without recognizing the essence of this illusion.

All financial business that describes economy is thus based on paying back a debt, since all earned money is initially borrowed money that must be paid back. But as everyone knows, there is also an interest on debt. And since money is created through credit, this means that the compounding debt of society is continually growing as we must borrow more money to repay our debts plus interest. This means that we have indebted ourselves even more, with even more interest requirements and so on.

This is a classic vicious circle. Those who have read a bit about systems theory knows that any system that has a positive feedback is doomed to collapse. Therefore, it is a mathematical inevitability that our monetary system must sooner or later break down. The existing monetary system allows that debt grows exponentially over the years, so that is doubling at an even pace, i.e.: 2, 4, 8, 16, 32, 64. Sooner or later the system ends up in a debt crisis where states, organizations and individuals no longer have the power or will to borrow more to make more money. Money needed to create even more growth in order to pay the interest of our exponentially growing debt.

The dysfunctional monetary system of today has a wide range of adverse side effects during its final stage (before the collapse) that get more apparent and emerge as we all now are becoming aware of. The interest makes a few accumulate more bills of debt (money) while the rest are becoming increasingly indebted. Some have to go bankrupt so that others can pay their interest.

Excessive growth of debt must be met with an equally excessive economic growth, when the liabilities are covered by a performance requirement. We must therefore work more and consume more — at any given price.

Growth is hence all of the economists and politicians’ stubborn mantra. Only through growth can we even try to catch up with the exponential growth in the interest expense of our debt.

Logically our debt grows even more when we try to meet its interest requirements. So we struggle in vain no matter what we are doing. The system must, mathematically, end in a collapse as our burden of debt grows to infinity. Meanwhile, the pressure to perform increases on people, nature and our social systems. Nature’s resources will, like people, get more out of balance. The exponential need for growth do not respect the natural need for recovery.

Societies are forced to save on the lookout for opportunities to cope with the increasing burden of debt. That is what we are seeing in many countries now where states are forced to save. While at the same time citizens are expected to consume so to increase growth so that an impossible debt can be paid back. This is an equation that does not add up.

In other words, there is a self-destructive mechanism built into our monetary exchange system. A society without a functioning exchange system is a society without a functioning division of labour and is in an acute existential crisis. Our current monetary system therefore imposes a serious threat to our nations. We must realize that the monetary system now must be changed. Only a financial system with an exchange of value will build a sustainable monetary ground, and gives us the opportunity to build a sustainable economy and therefore a sustainable and just society in the future.

—Carl Norberg

Please feel free to comment if you agree or disagree.

Trading vs. Poker

Having been a full-time poker player for a few years before I started my recent venture in finance, I have found many similarities between the two occupations.

trading poker

When I read the book Poker Wizards, a book interviewing some of the best poker players of all time, I found it very interesting to see how the poker professionals reasoned and how it was related to the financial markets.

Let us look at what Daniel Negreanu, one of the most acclaimed and well-known poker players of all time, has to say about the traits of successful poker player:

  1. The one quality that I think is definitely the most important in being a successful player is having good people skills.
  2. The second most important quality is an aggressive personality.
  3. Third is discipline.
  4. The last quality is having a fundamental knowledge of the game, which is the easiest part.

I could not have agreed more about this list of qualities that makes a successful player. The interesting part though, is that the same thing goes for the players in the stock market or other financial markets. So let us look at these four qualities one by one when it comes to being a successful trader.

People Skills

Most definitely one of the most important qualities! A good poker player knows that when the table is tight and people hold onto their money he should be more involved and putting his money in the pot more often. But if many players are involved most of the time, then he plays fewer hands.

The same thing goes for the stock market. When everyone talks about how good it is to invest in stocks and you hear stock tips just by visiting your local coffee shop, you better stay out. But when people loathe the thought of owning stocks, that is a good time to own stocks.
stock market psychology behavioral economic

Another way of seeing why you need good people skill is to understand what drives the stock prices. In the long-run it is the earnings of a company that leads the way for stock prices, but in the long-run we might have gotten broke already.

In the short-run it is the hope and fear of people who decides where the stock prices moves. This is what we call market psychology or behavioral economics. Instead of fundamental analysis of the company itself, many successful traders try to measure and use people’s behaviour when analysing the outcome of a trade.

An Aggressive Personality

I prefer to call it an unafraid personality. If you assessed the risk of your strategy you must be willing to follow through your plan and not change it just because you are currently losing. When people panic they often take the wrong decision.

Discipline

Even if you have the best trading plan in the world and make money 95% av the time, you might lose all those winnings in the last 5% of your trades if you trade inconsistently. You must also have discipline and routines to look over your trading on a regular basis to optimize results, but also take care of your well-being to not lose focus due to stress and other factors.

Another very important aspect that many people fail to follow is the discipline of game selection. Both poker players and traders alike love their game so much so they often join a game where they do not have an edge instead of waiting for the right opportunity. To sit out and not take a position is many times the right decision. Or to put it another way, to not get involved in losing games makes you a winner in the long-run.

Fundamental Knowledge of the Game

It is easy to get a fundamental knowledge of poker. Anyone can get it by reading a few good poker books. In the stock market this is much harder since there is not much scientific evidence about doing the right investment. Are value companies better than growth companies? Is it better to buy a stock with a low P/E? Many people have an opinion but if you ask them for some statistical evidence they think you are a donkey not taking their word for granted.

It is a big leak for a trader or investor who is using his common sense to take decisions instead of finding a scientific measurable edge. But just as in poker, those bad traders might win in the short-run and complain about being unlucky in the long-run. Do not become one of those people!

Differences between Trading  and Poker

Finally I would like to point out two differences between trading and poker. In poker, many go with their gut-feeling when taking hard decisions. They might see something in their opponent, a tell, that looks suspicious, and take actions according to that. That is fine! People have had millions of years to evolve skills in reading other people’s subtle expressions. But traders usually do best in avoiding that gut-feeling that usually comes from fear or greed instead of the body language of their opponent.

The similarity, however, is that you should try switching of your emotional senses in both poker and trading to avoid taking emotionally driven decisions. So much money has been lost in both poker tables and in the stock market for those emotionally driven decision. But your own emotions are one of the toughest challenges to master no matter if you are a trader or poker player.

My last point regarding the dissimilarities between poker and trading is that trading and the financial markets is much tougher to master than poker. It is much harder to find an edge in trading than in poker. If you have two aces and get your money in before the flop, you are making a good investment. That is a fact. In trading you rarely find those facts.

I want to finish of with a quote:

“Poker is like sex. Everyone thinks they are the best, but most people don’t know what they are doing.” -Dutch Boyd

I hope you enjoyed this article. Feel free to comment!

Related posts:
Ten Characteristics of Successful Traders
Quotes of Market Wizards

Reasons Why The Economy Got Bad

One of the most powerful figures in finance thinks that printing money is a way to save the economy.  

Alan Greenspan, the ex chairman of the US Federal Reserve Bank and one of the most important figures in finance for the last decades, thinks that printing money can save the US economy.

Obviously he must think that the US is the only country printing their money, and that the other parts of the world still use gems and gold to do their business. No wonder we are in a bad shape.

Enjoy the video!

[youtube_video=http://youtu.be/R21pkWbX6nM&rel=0&w=570 rel="nofollow"]

The Most Heavily Taxed Countries in the World and the Winner Is…

Here is a list of the countries whose citizens’ financial freedom has been revoked the most by its government. The 15 highest taxed countries in the world are:

Chart of the most heavily taxed countries in the world

 

 

Source: http://turbotax.intuit.com/

 

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