Thursday, June 24, 2010

Of Testosterone and Risk Taking

Many a commodities traders made very risky decisions during the peak of the Bull Market, but how risky is too risky and most of all does testosterone play a role?

By: Ringo Bones

As the alleged “rogue trader” of Société Générale named Jérôme Kerviel faced charges in a Paris court back in June 8, 2010 over his risky trading decisions that cost his company billions. And Kerviel was even described by former Société Générale chief executive Daniel Bouton as a terrorist. But does the extremely risky trading decisions made by the former securities trader for Société Générale explained away by chemistry – as in testosterone?

John Coates – research fellow of University of Cambridge – explains his recent findings on the role of testosterone in crucial financial trading decisions. Traders – especially men – tend to take more risks when their testosterone levels are on the high side. It has been recently found out that the more money a male trader makes the more their testosterone levels rise due to the “reward effect”. Does this explain the very risky decisions made during the peak of the Bull Market?

The testosterone to reward link can be a very vicious cycle in the profit-driven environment of securities trading, especially when risky decisions – if one is lucky – gets overgenerous rewards while disregarding the long-term effects of excessive financial risk taking. In situations like these, financial risks should be analyzed by the logical aspect of the trader’s brain – as opposed to getting off on a short-term reward high of a pheromone-addled brain. The “sex-appeal” of ungodly amounts of easy-money acquired in high-risk securities trading or even CFD trading in a highly charged environment can usually increase male testosterone levels. Thus skewing ones perception of the true long-term profitability of most issued securities. Moral hazards don’t even get a look-in anymore.

Crude Oil Industry: Still Economically Viable?

With a somewhat costly cleanup and huge compensation costs slated to be paid out by BP due to the Gulf of Mexico oil spill, is the crude oil extraction industry still economically viable?

By: Ringo Bones

With the Gulf of Mexico oil spill now on its 65th day - and counting, add to that calls for a boycott of BP products (like if that’s even possible), many now wonder whether the crude oil extraction industry is still economically viable. Oil industry experts say that it will probably take a hundred BP Gulf of Mexico sized oil spills occurring per year before safety concerns about offshore oil drilling get serious budgetary reconsideration in order to maintain profits - precipitous drop in share prices notwithstanding.

BP’s competitors – i.e. other oil companies – had accused BP of operating outside the industry’s norms when it comes to their safety budget. Case in point is the 1998 memo from London to their US subsidiaries ordering a 25% operation cost cutting measures that eventually compromised their operational safety. Unfortunately leading to the disastrous BP refinery explosion in Texas City back in March 23, 2005. Recent Capitol Hill grilling of BP had even uncovered safety concerns of a former Deep Horizon rig worker named Tyrone Benton being disregarded due to the company’s cost cutting measures.

When it comes to boycotting multi-national corporations who don’t know the meaning of corporate social responsibility – like BP – just skip filling up your car in BP affiliated gas stations. But when it comes to your where your pension fund is invested, it can be a bit harder because unless you have a very gifted hedge fund manager, it is very likely that your pension fund is invested in crude oil ETFs to maximize its rate of return. You know those crude oil companies that had been suspected for sometime of assassinating local environmentalists who are not very friendly with “big oil”. Economically viable or not, the true cost of oil extraction companies usually shows up on their impact to the environment and of the social stability in their sphere of operation – especially when other complications are now in the picture like former 9 / 11 victims relief fund chief David Feinberg now overseeing the 20 billion dollar BP Gulf of Mexico oil spill compensation fund.

Thursday, June 17, 2010

The Piece of the Pie Paradox

In our still fragile post global credit crunch fiscal environment, do our decision makers still know the difference between wealth creation and wealth manipulation?

By: Ringo Bones

The concept of wealth creation can be a paradox in itself. Everyone is clamoring for his or her own piece of the pie, unfortunately, someone has to make it – and believe me, most “everyone” is not cut out to be able to make a good pie. Thus bringing us back to the paradox behind wealth creation, that is we cannot share the wealth until someone – and there’s not a lot of them just lying around – creates the wealth. In short industrial production of quality products produced under safe and environmentally sound working conditions were the workers are well cared for has been – and always will be – the surest way for a sovereign country and / or economic entity to create real wealth and prosperity.

Even the folks who initiated the Bolshevik Revolution back in 1917 understand the concept behind wealth creation that enabled the supposedly “capitalism clueless” Soviet Empire to last a little over seven decades. I mean have you ever seen those Soviet-era posters extolling the virtues of industrial production? Well, just about everyone got this down to a science. Without which Wall Street and other centers of the global stock market would be nothing more that over-glorified centers of wealth manipulation. One that relies on hedge funds, naked short-selling and overly complex derivatives to manipulate the redistribution of vanishingly small amounts of wealth – especially if the primary means of wealth production, as in the manufacturing industry, happens to go awry.

Back in 2008, it was those same over-glorified wealth manipulators that sent our global economy to the brink of collapse. Unscrupulous manipulators that blew smoke up our asses in their “successful” attempt to convince everyone about cheaper-priced goods are better. And product quality is a ting of the past and is now rendered irrelevant. Unfortunately, their marketing spin managed to convince almost everyone that cheaper goods are indeed better and that quality products belong to the distant past and are thus irrelevant - thus endangering the livelihoods of skilled manufacturers, especially in the United States and Germany, former centers of high quality goods manufacturing. In short, our insatiable demand for cheap products produced under slave-wage and dangerous conditions have endangered the wealth creation capability and / or potential of every established and emerging economic entity around the world.

Austerity Now, Poverty Sooner?

It might seem like a very logical way to rein in on one’s runaway sovereign debt, but will draconian austerity measures eventually result in widespread poverty?

By: Ringo Bones

From my perspective, it does seem appear to be the most logical step a sovereign country can take in order to rein in on runaway sovereign debt, but will it result in initiating an even deeper recession or perhaps a full-blown economic depression? Tenured economists even think that this could initiate that dreaded double-dip recession that the global economy is desperately trying to avoid in our still fragile post-credit crunch global economy. Sooner, rather than later, the EU will be facing the problem of how to make sound fiscal decisions with ever-dwindling tax revenue brought about by those draconian austerity measures.

Fortunately at present, EU style draconian austerity measures adopted by heavily indebted Euro zone member countries had not yet become in vogue in the United States. Every economist worth his or her salt perceives that austerity measures seems to run counter with what we’ve learned about Keynesian Economics that had bailed the global economy from the Great Depression of the 1930s.

There is this somewhat strange and not-so-old adage that goes: “Before any of us can cut out pieces of the pie, somebody has to make it.” Or that oh-so-true share-the-wealth paradox that goes: “We can’t share the wealth until we create the wealth.” I’ve first heard these “jingoism” during the transition phase of President George H.W. Bush to President Bill Clinton back in 1992 – unfortunately, it still holds true today. Euro zone policymakers should concentrate more on reforming their inefficient taxation system that allows the extremely rich to get away scot-free when it comes to paying their fair share of taxes.

Will EU austerity measures eventually compromise the wealth generating aspect of their economy – i.e. manufacturing – and instead turn the Euro zone into a wealth manipulation based economy of bankruptcy remediation where the ever shrinking wealth are yet again redistributed in vanishingly small quantities? When the wealth creation side of a typical sovereign nation suffers, this usually results in lower tax revenues – thus endangering a sovereign government’s ability to serve its citizens. Let’s just hope that EU style austerity measures never become a global phenomena or that Eurozone countries realize their folly before every country Europe starts saving their way into economic stagnation. Present austerity measures – like the recently approved quantitative easing measures – had mainly affected the Euro zone’s working class.

Friday, June 4, 2010

Credit Rating Agencies: Too Powerful For Their Own Good?

Under fire for losing their objectivity when it comes to assessing the true credit worthiness of issued securities and sovereign governments, have credit rating agencies become too powerful for their own good?

By: Ringo Bones

For anyone watching the blow-by-blow account of the Financial Crisis Inquiry Commission (FCIC) hearing back in June 2, 2010, it seems like the preconceptions since harbored by everyone critical of credit rating agencies since the few preceding years before the start of the 2007 subprime mortgage crisis has been proven right yet again. Credit rating agencies had truly become too powerful for their own good for two main reasons. One, they are not exactly unbiased when it comes to assigning the true credit worthiness or credit rating of issued securities and sovereign governments under their purview and two, they don’t do their share of due diligence – as in legwork - to assess the true credit worthiness or credit rating of financial instruments issued by securities issuers and sovereign governments under their purview.

Financial Crisis Commission Chairman Phil Angelides had recently grilled the two prime “instigators” of the 2007 subprime mortgage crisis. Namely, the famed investment guru and Berkshire Hathaway CEO Warren Buffett and Moody’s CEO Raymond McDaniel over the loss of credibility of credit rating agencies in the June 2 FCIC hearing under full press fanfare. Also on the agenda is the credit rating agencies’ inability to warn institutional investors against the impending subprime mortgage crisis that started near the end of July 2007 that nearly brought our global financial system o the brink of collapse. And yet Buffett and McDaniel – in their defense – have reiterated yet again what every seasoned investor already knew about the preexisting systemic faults that plague credit rating agencies.

According to Moody’s CEO Raymond McDaniel, it is very difficult to avoid potential conflicts of interest inherent in a typical credit rating agencies’ assessment of the credit worthiness of a typical sovereign government and / or typical issued securities. Inevitable considering that a lion’s share of the salaries of credit rating agencies’ analysts came from the securities issuers and the sovereign governments under their purview. McDaniel’s reassurance that Moody’s are on top of valuations and possess enhanced analytical integrity seems sacrosanct to anyone who had experienced the global financial crisis first hand. But McDaniel managed to shift blame to the Bush administration era financial watchdogs for initiating a sudden tightening of credit in s softening housing market, which made hell to everyone wanting to restructure their mortgages.

While Warren Buffett’s “behavior” prior to the start to the subprime mortgage crisis does seem suspicious – i.e. he dumped his Fannie Mae and Freddie Mac shares from his investment portfolio just before the housing bubble burst citing its focus on enhanced earnings. Buffett also did the still trendy thing to do during the June 2, 2010 FCIC hearing – blame credit default swaps and related derivatives as the primary instigators of the subprime mortgage crisis. Buffett says that credit default swaps are the financial world’s equivalent of weapons of mass destruction because they provide so much unfair leverage, also citing that their improper use posed system-wide problems that led to the subprime mortgage crisis.

Securities issuers and sovereign governments – more often than not – usually resort to do what most unscrupulous restaurant owners do in order to drum up business – pay exorbitant sums to an A-List restaurant critic to make his or her restaurant appear better to potential diners and patrons than it actually is. Seasoned investors have caught on this “dirty trick” since the credit rating agencies has first set up shop, thus making them view credit rating agencies with suspicion and often take their assessments – in the form of credit worthiness reports – with a grain of salt. Maybe credit rating agencies had truly become too powerful for everyone’s good, especially when moral hazard concerns are often lost in the relentless pursuit of profits.