Financial crises related to balance sheet problems in banks take years to resolve, and now we start to realize that. The liquidity run we experienced in 2009 is now far behind us. The rollercoaster is rocking the markets, from the ghosts of sovereign default to foreclosures, the impulse response has a very long tail.

Banks' balance sheets have still not recovered. Banks are still being seized, with more than one hundred banks seized in the US for 2010 alone. Even sovereign balance sheets are looking very bad, and we are not running out of surprises. 2011 and 2012 will be a bad year for Greece, we haven't seen anything yet.

Intel has had a good first quarter in 2010, but that was probably just restocking. The sales are expected to fall sharply for the second half of 2010. This means that consumers are not spending. They are not spending because they want to deleverage and repay their loans. Unfortunately, massive deleveraging encourages deflation, hence the debt burden increases instead.

Why? Because wages decrease while the debt burden remains the same. The latest news was that US call centers are now competing with Indian call centers, don't tell wages did not fall to get to that. If your wage falls by 10% but your debt does not, well, you have spend less.

And with 70% of the GDP in the US coming from consumption, I don't think we will see a rebound any time soon

deflation | deleveraging | balance sheet | financial crisis

Finally, there it is, the finance bill has been agreed upon, but what do I do with my portfolio?

The answer is not obvious, unfortunately. The finalized bill takes away the uncertainty of surprises, a good thing for markets. Uncertainty is always traded at a discount, so we can expect a very short term spike in stocks. Additionally, taking away risk-taking from banks is definitely a good thing, back to good ol' banking: deposits and lending. Investment banks will still play the information asymmetry game, but CFOs will get smarter.

Indeed, all the prop trading and hedge funds within banks will have to be carved out, or simply closed.We can therefore expect new hedge funds to be created, and some of these so called top-notch traders to join CFO offices in the industry. This knowledge transfer to the industry is both good and bad. It is good because companies will be able to benefit from more financial knowledge, better hedging, and they won't be easily screwed by investment banks. Unfortunately, it also means that risk taking will now slowly move to the industry. Expect some high profile blow-ups in the industry in 5 to 10 years from now.

Coming back to the investment banks, they will massively migrate to emerging markets. The information asymmetry game is still alive in emerging markets, were selling exotic products under the name 'no risk - sure win' umbrella still works. Debt-fueled growth will now shift to emerging markets.

However, in terms of good ol' banking, growth will not be fueled by banks and debt in developed economies. Banks are being reined in, lending standards are toughened, and anyway, banks are not in the mood for lending, simple. Medium term will therefore see a very slow economic recovery, don't expect the S&P to reach 1400 anytime soon.

finance bill | economy | lending | CFO | loans

Betting against the Sterling is back in vogue as speculation reaches record levels after the UK general elections. 

Positioning data from the Chicago Mercantile Exchange, often used as a proxy for hedge fund activity, showed that speculators had extended their bets against sterling from 72,188 contracts to 76,745 contracts, equivalent to $6.9bn, in the week ending May 18.

The ratio of shorts to longs is now nine-to-one. Not sure if Soros is playing that game now, it looks more like his apprentices trying to imitate the grand master.

The kids won't break the Bank of England this time round, but they might well make substantial gains, Uk and Europe are broke...

Soros | economy | Sterling | Forex

Now that we have seen a huge surge in the stock market, we cannot expect this rally to continue at the same pace. The question is then, what to do with the money? There is always market timing and trying to short the index, now that a correction might be gaining strength, but that is only short term and pretty risky.

Long term investments is about buying cheap something that can weather the shocks. Last year we could have bought anything, the only way to go was up. This year is a little different, we need to make a choice. There is always investing in the market index, but some stocks might do better. Hence a mix of index and good stocks look like a pretty good diversification.The index is very often made out of large caps, except for small cap indices of course.

So what's interesting for now? Buy-back stocks. These stocks are shares of companies that recently launched a buy-back procedure to buy their own shares. Research has shown that those stock, on average, outperform the market significantly. However, don't invest in any buy-back share without a thorough investigation.

Our research has shown that two stocks are worth looking at for the moment:

Both look healthy, with strong cash positions, low debt, but most important, their buy-back procedure tells us that the management believes the stock is cheap.

buy-back | value investing | stocks

Did you ever wonder what this financial crisis taught us? If you did, you probably came to the same conclusion as me: if you don't cheat, steal and bribe, you go down.

As a banker, your job is to manage risk. You borrow money from depositors and you lend it to entrepreneurs and businesses who create jobs. If the difference in interest rates between what you borrow and what you lend is equal to let's say 3%, you can only allow for 3% default per year to break even (without taking into account the salaries and the very expensive offices). Hence, risk management is of the uttermost importance, if you do not want to go belly up, you better be good at spotting good borrowers from goats.

This is how democracies and open markets work, you do a bad job, you go down. Basically, you lose your job and you have a stigma that you did not perform well. In your next job you will have to take on a lower role to show that you are still capable of learning and adapting your frameworks.

But that is an utopia. In today's world, the worst you perform, the better off you are. Basically, all you need to do, is to build up short term profits at the expense of long term losses. In the short term, you reap all the bonuses, millions of dollars, and when the time comes to pay the bill, just walk away, or worse, hold your directors, shareholders and detbtholders for ransom!

The financial structure you created is complex enough such that you are part of the few people who know what it really means. Although it is not that complex, just use some buzz-words like CDO, CLO, CDS, and the amounts involved. Everybody gets scared and they pay you a bonus to stay on board to manage the shit hitting the fan. How fantastic is that! You are paid to build up liabilities that will destroy shareholder value but which generate great bonuses, and then you are paid great bonuses to manage the liabilities.

That sounds like the new definition of banker: bonus management.

economy | crisis | bonus | finance | financial models

If you are suffering from incredibly high interest rates on your credit card, it is never too late to convert to a low APR card. Converting your interest rate to an affordable number has an impact larger than you might think, a few percentage points difference can change your life.

Unbelievable? Try out the Wealth Manager or the Prosperity Planner  to see the difference between a 23.99% interest rate and a 19.99% interest rate. Over 10 years time, the difference you pay in fees on $10,000 is simply $24,000 !!!

So now that switching to a lower interest rate can actually make you save a lot of money, how to do it?

To convert your existing card into a low interest credit card, follow three simple steps. Firstly, establish a good credit history. Secondly, do some intense research, and thirdly, negotiate with your credit card company to give you a lower rate.

Step 1: Establishing a good credit history is the hardest step to perform in this three-step approach. If you have a flawed record of credit card payments, you must first build a better credit reputation. It takes time to do it, but there are ways to get there. For example, find a credit card or that offers you the service of rebuilding your credit rating. Your credit rating is important in building credibility, because the cards you will have access to will offer you better rates. After achieving a good credit score, you can move to step two.

Step 2: Do some research on the available credit cards in line with your credit score. The goal is to match your card to a low interest credit card from any credit card company. Search for a card that works like the one you have, but with a better rate. If you can come up with at least two which offer the same rewards, incentives, and privileges like your current card, you are all set for the third step: negotiation.

Step 3: Negotiating with a credit card company. With the data from your research in hand, call the credit card company and ask them to lower the rate on your current cards. Cite a good credit history, and make them acknowledge that you will be quite a loss in their list of customers if they do not give in. Use your research data wisely to put pressure and obtain what you are calling for. The main reasoning behind the fact that you can achieve this is that if others companies can offer similar cards at a lower rate, why can’t they do the same thing?

After doing all three steps, two possibilities will emerge. The first possibility is that with all your excellent reasoning and research data, your credit card company will give in and your old plastic will be converted into a low interest credit card.

The second possibility is that your request will be denied, at which point you could cheerfully terminate your contract with this old company and sign on with a new one. There would be no trouble choosing because you have already done the research, and have at least two ideal cards in your list.

You just saved quite some money!

banks | wealth manager | credit card | compare credit cards | credit card providers

We know George Soros and Jim Rogers for their outspoken views and worldwide coverage to make their points - and a sensible profit from the market movements they create just remember when Soros broke the Bank of England, just to make 2 billion $ out of it)

Now we are experiencing another phenomenon - economists going public to make their point.

They are either there to support a politician, or to argue about Keynesian methods - To Keynes or not to Keynes

Krugman is the latest to date to join the club. A Nobel Prize winner, he recently published his book 'Depression Economics' (a must read by the way), and he now is now an outspoken supporter of an additional Stimulus package. He loves Keynes, doesn't like Bush (who does) and explains in layman's terms how recessions come to life and how to get rid of them.

Writing books to educate the consumers about recessions and why stimulus packages are necessary is good, engaging in politics is something that would probably confuse people more than anything else Academics are known to analyze the world from their laboratory, not the real business world.

As an example, I'd like to mention that Krugman rightly points out that the real economy is stuck partly because the banking system cannot support the real economy with the credit flow it needs. The bubble burst because the shadow banking system disappeared, and the regular banking industry is not able to replace it (one of the reasons it started as a shadow banking industry, right?).

So, is a stimulus package what is needed, or shall the politicians force banks to lend more (instead of investing the cash in the stock market and generating a crazy rally)?

recession | stimulus | stimulus package | Krugman | stock market

It looks like the financial crisis based due to CDOs, CDS, and other exotic products did not have any effect on making the financial terms any easier.

Popular risk analysis tools were based on the 'simple' Geometric Brownian Motion, but that seems now to be based on wrong assumptions. AIG paid the cost of it I would say.

Using models is good. Models are powerful to help you understand the mechanisms behind what happens in real world. It will always be just a model and not reality, but the insights that you can get from using models is the first big step towards becoming an expert. However, the models have to be based on sound assumptions, and in finance the assumptions are wrong.

First of all, the main assumption behind todays financial models is that risk is 'normally' distributed. Risk is probabilistic aspect of price changes that is random compared to what we expect. This randomness in finance is assumed to be normally distributed, a well-known distribution that is too simplistic compared to what really happens in the markets. For example, a normal distribution can be expected if the market incorporated all the information and priced that information correctly. 

Definitely, we know that this is not the case, because we would not have booms and busts like we have seen in the recent years. If all information is correctly priced, stock markets would move slowly, up and down. Downtrends would still be present, but no radical crashes would be expected.

Other assumptions are taken into account in todays model, such as constant volatility over time (just check the VIX index to see that this is absolutely not the case), independent price variations from one day to another, etc.

The outcome of it is that new models are coming up, one of them is the Fractional Brownian Motion in Multifractal Time. A big name, a complex model, and the way to generate a computer output is to use Monte Carlo simulations. Not very nice, this is a just brute force way of computing a set of possible outcomes...

A more analytical way would be nice, but before that, it is of uttermost importance to clearly understand the way markets behave to be able to put it in simulation models for us to understand!

brownian motion | financial tools | financial models | finance

"An investment in knowledge pays the best interest." - Benjamin Franklin

Pump up your financial knowledge, that is definitely the highest paying interest you can get

financial literacy | financial education | finance

What a news, now that bonuses have raised public anger, bankers have now found the solution: raise the salary by 50%. That is exactly what UBS is doing.

Now you do not need to do anything to get a bonus, you get it by default. Not much has changed you will tell me, bankers were getting their bonus while their trades were failing, but now it gets even better.

People do not seem to understand where the incentives lie, everything is made to screw the hard-working class over and over again. 'Please bend over' is the motto at the banks nowadays.

banks | bankers | bonus | UBS

In March I blogged about the impact of this credit crisis and what to expect on a macro-level. In a nutshell, what I was saying is that since the financial industry cannot regulate itself, policymakers will impose new regulations. The post goes takes this as a basic assumption to extrapolate in the future and predict what is going to happen (view the post on The exodus just started; The 'making of' the next market crash. Watch my words), but here it is:new regulations start to flow!

President Obama met with the credit card companies to impose new regulations to stamp out abusive rate hikes and fees on credit card holders. Of course this sounds normal, but the meeting had a much deeper objective: the White House wants the contracts to be written in understandable language and to make sure the consumers are protected because the credit card companies have too much power. That sounds like the exorbitant lawyers fees that large companies can afford to squash any resisting consumer...

Changing the contracts to make it understandable is a valuable proposition, but how is the legal system going to deal with that? This will provide new research programs for PhD students in law

On another note, abolishing the small prints would be a GREAT idea. I believe Singapore is moving towards that direction, let Uncle Sam learn from us!

regulation | credit card

With a shrinking GDP and the property prices boom we had in 2006 - 2007, property prices were bound to go down. Year-on-year property prices are down 20% now, but did we touch the bottom?

An analysis by DTZ shows that property prices are not set to recover before mid-2010. With the bulk of new condos coming to the market, expats leaving Singapore due to the current economic downturn (it is being said that 6,000 Japanese expats left Singapore in March 2009), and a shrinking GDP, properties are going to suffer.

Basically, simple economics teaches you that with more supply and less demand, prices will drop. The boom brought many developers to build massively,but now the tide has turned. Real estate development has always been a boom and bust industry, and it did not change. I wonder what all those MBAs working at those companies actually learned...

But there is an additional factor pushing down prices: GDP per head. Banks are managing their risks on mortgages by imposing a limit on the maximum mortgage that anyone can take based on the salary. The limit is today set to 40%; this means that only 40% of your salary can be used to pay off mortgage.

So obviously, when the GDP shrinks resulting in a lower salary, the maximum mortgage you can take is decreased, hence the property you can afford must be cheaper resulting in a depressed demand.

properties | property prices | GDP | economy

There is much going on these days in the field of financial literacy. I remember, when we first started in 2006 with this project, it was difficult to find listening ears to our story on how to set up user-friendly tools for personal finance education. And all of a sudden, guess what, financial education is the hottest topic around!

The current financial turmoil and its impact on businesses and consumers opened the eyes of many, jumping on the bandwagon and riding the wave, a good thing to be in financial literacy these days. I can't complain.

Not only is there a real need to increase the understanding of financial investments, there is also a huge need to get better information from financial institutions. When you see how financial products are being sold on the back of a big bank's brand (= if it's from this bank, it must be good), something is definitely wrong. Large brands do not mean good stuff, and the opposite is often true: small is beautiful, handicraft is a gauge of quality. We often forget this.

With the globalisation opening the playfield for mega-mergers, large brands ruled. But in banking, they lost.It is game over for large brands in banking, the new regulations won't allow them anymore. They are too dangerous, not only for the consumers, but also for the country in which the HQ is located. For example, imagine a small country with three large global banks, if a banking crisis occurs and the banks need government support, this little country won't be able toinject the necessary funds: Game over. This is what happened to Iceland by the way.

This concept is for the moment contained to the financial industry, but thinking outside of the box, why is it so that private companies are getting larger and larger? Is it for the benefits of the consumers? And of the shareholders? Bullshit, it is just to the benefit of the management! Now just think of GM and you will get my point. When you are CEO of such a huge company, you are not in touch with the reality anymore. You are used to fly on a private jet, and when it comes down to deciding which kind of cars you should design / develop / build / market in the future, one little mistake has disastrous effects.

Moreover, with design and development centers being co-located for cost efficiency, what are the employees doing in the other countries? Sales and marketing... the death of creativity, you got it. Again, small is beautiful, entrepreneurs create value, they are the source to growth, and to quality. Because they know what their customers want, because they are in field talking to their customers, because thy understand the pain to be solved.

Anyway, this brings me far away from financial literacy, but my point is: you cannot trust a large corporation selling things following an un-personal process. It is not for you, it is for the company, it is for the management. And the same management is after short-term profits. Hence, get your financial literacy up and running, make sure your Financial IQ is at the top to be able to challenge what is sold to you, because it matters.

The deep shit we are in now is partly because of the product structurers who did not know what they were selling, but also because the investors did not ask the right questions! They trusted the products blindly, and you know what trust is worth when you talk about money!

Financial education is the next big thing, and education in general. E-learning is seen as one of the next big things to invest in forthe VCs in Silicon Valley, my bet is in financial education. Because there is a huge gap between what Main Street knows and what Wall Street knows, and that gap must be filled in order to restore trust, investments, lending, and ensuing growth.

financial literacy | financial education

It was a nice bear rally, but for those who thought the economy was bouncing back, it was just a stock market bounce, the economy is still in bad shape.

The financial statements of the first quarter will be disclosed soon, and the nervousness is gaining momentum. This translates into volatility, and traders taking their profits before the bad news is released...

The real stock market bottom might not have been reached yet, unfortunately...

stock market | economy

The US retro-active tax for bonuses paid-out at bailed-out companies seems to make a lot of noise. Two extracts from the FT:

Senior executives on both sides of the Atlantic on Friday warned of an exodus of talent from some of the biggest names in US finance

“Commodity traders are already moving to companies like BP where they can make as much money as they used to,” said another banker at a US firm.

Well, well, well, wasn't this very predictive? On the 18th of Feb, I wrote "The CFO office to become the next big thing" in my blog, explaining where these high-flying / fat-paid bankers would go while fleeing away from the banking industry.

It is important to understand that policymakers won't let go the financial services industry without imposing tough regulations. Policymakers will, as usual, overshoot, and try to regulate each and every little aspect in the financial companies, leaving no room for big egos like top bankers. Instead, such a regulated industry will only attract paper pushers.... do not expect to get any favor from your banker any more, because compliance won't allow him to.

Anyway, this being said, with all these big ego bankers moving to the private industry, you can be sure the next crash (something like 7 years from now I guess), will be in the private industry. I can already see myself writing about large multinationals operating trading desks that eventually brought them down on their knees. I would advise Warren Buffet not to sell puts on Cargill, Nestlé, Bunge, and BP. The day put options are cheap again, I buy a 9 year put on these companies, for sure I will make money out of it!

See you in 7 years time  :-)

bankers | market crash | CFO

Nassim Taleb, not only known for his outspoken critics but also world famous for his book entitled 'Black Swan', gives us a very neat description on why bonuses in the banking industry are at the basis of this crisis.

The incentive scheme based on bonuses is exactly the opposite of what it should be, the reward should be focusing on the long term strategy of building something to last.By contrast, the bonuses are made to make a quick buck, and cleaning the shit is left to others when the banker is long gone.

Nassim says: "Take two bankers. The first is conservative. He produces one annual dollar of sound returns, with no risk of blow-up. The second looks no less conservative, but makes $2 by making complicated transactions that make a steady income, but are bound to blow up on occasion, losing everything made and more. So while the first banker might end up out of business, under competitive strains, the second is going to do a lot better for himself. Why? Because banking is not about true risks but perceived volatility of returns: you earn a stream of steady bonuses for seven or eight years, then when the losses take place, you are not asked to disburse anything. You might even start again, after blaming a “systemic crisis” or a “black swan” for your losses. As you do not disgorge previous compensation, the incentive is to engage in trades that explode rarely, after a period of steady gains."

Add on top of that the fact that most banks are traded on the stock exchange, what happens to the bank that is conservative and thinking about the long term? Its share price underperforms. Shareholders then blame the management for not doing enough and usually we see activist shareholders investing in the company to take a board seat, change the strategy, be more aggressive (which means take more risks)and make a quick buck.

Isn't that what happened to ABN AMRO? Shares were underperforming, The Children Fund (an activist hedge fund) invested and made loads of noise, finally ABN was sold to a conglomerate of banks:

You know what happened to two of those three banks: RBS is now owned by the British state and they are discussing the closure of all foreign branches, and Fortis has been dissolved and is now owned by the Dutch, Belgian and Luxemburg governments....

Fantastic industry isn't it? Maybe part of the problem lies in the concept of the stock market ...

Nassim Taleb | banks | RBS | Fortis