Finance and Stuff

Thoughts on finance and other stuff by Johan Lindén

Tag: Stupid Authorities (Page 1 of 2)

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!

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.

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.

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:

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:

The Truth Behind Technical Analysis

Let us take a look at technical analysis, which is used by many to make a profit by predicting the stock market.

Technical analysis is a set of tools used to analyze the movement or behavior of a stock or index instead of the facts surrounding the company or the economy, which is usually used when trying to predict where stocks are heading.

trend channel technical analysis

Trend Channels

Some use trend lines or channels to figure out the trend, some use resistance and support lines to see where there will be a lot of buyers or sellers.

One of the problems with this approach is that in any given chart, even randomly produced, you will in hindsight easy spot a trend. Of course if a chart is randomly produced you will not be able to forecast the next move. So how come you can do that in the stock market?

People in the field of statistical analysis are often dogmatically blindfolded. They might claim that since so many people are using it, it cannot be wrong. Or they know successful people who are using it, or even use it successfully themselves.

technical analysis support resistanceHowever, this type of reasoning suffers from strong statistical bias, such as survival bias, where only the winners tell the story about how good it works. While the losers go back to their jobs and usually do not speak so much about their failure. It could also be that since some only use a long strategy only, in a rising market. In other words they would have done well be just buying and holding.

Scientific research

Now let us look at the scientific research in this field. Oh yes, there is quit a bit of research, but strangely enough it never reaches the believers.

In the research paper “On the Analogy Between Scientific Study of Technical Analysis and Ethnopharmacology” via CXO Advisory they write:

There are four areas of similarity between folk medicine and technical analysis:

  • Both have foundations in folk science, with most claims proving false when subjected to rigorous scientific testing;
  • Both have strong potentials for statistical bias, the placebo effect for folk medicine and data snooping for technical analysis;
  • Both boast commercial popularities that support large markets for products/services; and,
  • Both are possible sources of scientific knowledge (for pharmacology and financial economics, respectively).

The essential lessons from folk medicine for testing of technical analysis are:

  • The study of technical analysis should mirror the rigor of drug evaluation methodology (e.g., randomized, double-blind, placebo-controlled trials involving homogeneous populations);
  • The study of technical analysis should include greater emphasis on explaining the behavioral mechanisms underlying hypothesized market inefficiencies; and,
  • There should be a independent peer-reviewed journal devoted to the rigorous testing of technical analysis.

In another scientific peer-reviewed paper, “Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals” via CXO Advisory it says:

David Aronson opens with two contentions: (1) “much of the wisdom comprising the popular version of TA does not qualify as legitimate knowledge;” and, (2) “TA must evolve into a rigorous observational science if it is to deliver on its claims and remain relevant.”

None of the 6,402 rules tested on the S&P 500 index, after adjusting for data mining bias, generate statistically significant outperformance. More complex/nuanced rules, or other financial data sets, might indicate abnormal returns.

From the paper “Identifying Noise Traders: The Head-And-Shoulders Pattern in U.S. Equities”, where a commonly used technical pattern called “Head and Shoulder” the following is summed up by CXO Advisory:

The author determines that head-and-shoulders pattern trading exists but is on average unprofitable, mistakenly interpreting randomness as information.

Is technical analysis worthless?

Yes and no. It is if you do not have a quantifiable edge. That means that you must have a statistical edge before you trade or invest. A rigorous back-test of your hypothesis must be done. What most people seem to do is that they are guessing or using some false authorities providing them false information about what is supposed to give them an edge.

Not even if you are back-testing your strategies to gain a statistical edge you are guaranteed future winnings. In fact there will be long periods, minutes, hours, days, or a lifetime where a historically proven winning strategy will become a losing one. To avoid this, look over your strategies often and see if they are obsolete in the current environment, and use many different strategies to diminish the risk.

The human brain is not particularly well wired for finance and trading. That is the reason why not even central bankers or countries know how to run their economies.

Most of the argument on technical analysis above can also be applied to fundamental analysis such as P/E-ratios, the FED-model, dividends-yield, et cetera, but that is for another article.

I would say that probably more than 90% of the “knowledge” out there on trading and investing is bogus, so watch out. Maybe even this article is, so always use your most critical judgment, and if you cannot, staying out of the markets will win you do most in the long-run.

Good luck! (or rather stay out of the luck part and in to the field of competence instead)

Free Markets are the Usual Suspects in Economic Turmoil

In dire times people are looking for scape goats. One of the most common scape goats is the free market. So is the free market really the problem? Let us look at what countries do in these troubled times.

  • First, they blame other countries for unrighteously compete with their domestic industries, setting up tariffs for foreign trade, thus engaging in trade wars, instead of letting competition rule.
  • Second, they increase regulations on businesses, blaming trading robots, short-sellers and other participants, and trying to interfere with these tools of the free market.
  • Thirdly, the state out-crowds sound private companies by engaging in their own businesses with the unlimited resources of the public. This is just one of many things the state do to ruin private businesses. Out-crowding is also done by manipulating the interest rate so it either becomes too high or too low, and thus ruining the private businesses’ ways of doing business at market rates.

So there you have some of the reasons why bad gets worse. With all these things happening at once in already fragile economies, there is no wonder that the economy usually hits a depression or crash before things get better.

Also note that all these signs are signs of socialism, taking us further away from the principles of free markets. A free market is a market without rules governed by the state, but instead by rules made by the market’s own participants.

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.

The Rise of the Machines

computer guided tradingLast week we could read from the supposed to be knowledgeable people that short-selling (see article) is to be blamed for falling stock market. Yesterday it was the computers turn to be blamed.

According to some financial “professionals” it was the computer guided trading that is to be blamed for many of the big declines in the market, such as the one we saw yesterday when stocks fell 5-6% across markets. I wonder how the authorities think that their ban of short-selling turned out?

From time to time you will hear other equally ridiculous claims such as it is the fault of the:

  • Institutions
  • Daytraders
  • Short-sellers
  • Scared Investors
  • Analysts
  • Investors taking wrong decisions

I guess markets still have a long way to fall when we hear these ridiculous claims trying to explain why the stock market declines.

Warren Buffet Wants Increased Taxes

Warren Buffet is calling for higher taxes for the really wealthy to pay off the US deficit. 

warren buffet on higher taxesBillionaire Warren Buffet wrote the opinion editorial in today’s New York Times and calls for higher taxes for everyone earning more than 1 million a year, and even higher taxes for the few thousands of people who earn more than 10 million a year.

He says he has been talking with his mega-rich friends and that they have the same opinion. Well, I am not surprised. Many of these billionaires are contributing a lot to charity, and Buffet is one of the biggest in the world. It is not hard to understand that they want to contribute even more now when they see that the country that brought them their fortunes are nearing a collapse.

Buffet also says that:

“While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks.”

This editorial got me thinking. Coming from the highest taxed country in the world — Sweden — I am against high taxes, but when a country is in great debt and that country need income to repay its financiers, you need a plan.

So why not let the people who have the best ability to pay and, most likely, have been the ones that benefited most from the economic growth help paying a bigger part of the bill.

I am against taxes, but when a country has a big deficit it means the taxes have been too low! Reduce government spending and lower taxes will follow.

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