President-elect Barack Obama’s plan to save the US economic system has always been referred to by his detractors as socialism. But is “Obamanomics” merely just a system for spreading the wealth like it’s detractors claim it to be?
By: Ringo Bones
Our current global economic crisis can trace its pedigree back to the days of Reaganomics – i.e. the former US president Ronald Reagan’s view on economics that the Federal Government hinders rather than helps the US economic system. “Big Government” is bad for business and should get out of the way. Although right in many respects, I do find Reaganomics - as it was then affectionally called - somewhat hypocritical given that then president Reagan is staunchly against Marxist-Leninist Socialism / Communism. Yet he gave Wall Street overlords tax breaks and too much power.
It is a well-known fact that in the financial world – especially in the US – the existing financial power structure preclude their client’s opinions and views from ever becoming a factor in directing a financial company’s fiscal decisions. Thus the clients (this means every investing US taxpayer, including those government powers-that-be) must trust the financial company’s “top brass” – the Wall Street “ruling elite” to make the correct decisions for them. Using former president Ronald Reagan’s dictum “Trust but verify”, this makes the belief in an all wise and ever caring Wall Street a veritable twofold lie. A twofold lie because this assumes that the "ruling elite” at Wall Street knows what they are doing coupled with the assumption that the Wall Street “ruling elite” cares about the clients they are supposed to serve. But since socialism rests on the idea that one person can make a decision for another person without a working system of checks and balances, does this make the laissez-faire nature of President Reagan style economics / Reaganomics really just socialism in disguise?
I’m also one of those people who was never been able to have warmed up to the concept of trickle down economics – giving the ultra rich tax breaks to foster economic growth and working class prosperity. I’ve always viewed it like the way primitive cultures conduct human sacrifices to appease the gods. I mean if giving incentives to the very rich in the form of tax breaks really did benefit them, two things could have happened. Either they – the Wall Street ruling elite - would have been building mansions on the Moon by now thus generating an employment bonanza by hiring maintenance crews or have manage the economy so efficiently since the Reagan Administration that our current global financial crisis would not have happened. Ronald Reagan’s greatest oversight is probably the US financial system deregulation given that the root cause of the subprime mortgage crisis – namely mortgaged backed securities – had been busy making inroads into Wall Street since 1977.
Ever since the days of the Great Depression, successful schemes designed to fix the US economy always involved spreading the wealth. Each time the US Government creates roads, dams, and other infrastructure, it tends to spread the wealth around in the form of jobs. This scheme differs itself from Marxist-Leninist Socialism because it is governed by checks and balances that keeps corruption and malfeasance to the absolute minimum. But President-elect Obama better act fast on his plans to fix the American economy via infrastructure rehabilitation before the obstructionist policies of the opposing party can take hold. President-elect Obama should take advantage of this once in a lifetime chance of a party majority in the legislature to test out his Obamanomics to prove that there is hope yet for the long ailing US economy.
Monday, November 10, 2008
Thursday, October 23, 2008
Credit Rating Agencies Overhaul: A Way Forward for the US Economy?
Blamed by everyone in the financial world as the instigators of the global credit crunch. Will a credit rating agency reform revive the ailing US economy and possibly the rest of the world?
By: Ringo Bones
As of October 22, 2008, America’s three leading credit rating agencies – namely Moody’s, S&P, Fitch – had their respective CEO s testifying on Capitol Hill on the future stake of the credit rating industry. Credit rating agencies came under fire recently due to their dubiously unsound – and sometimes – illegal practices in order to gain competitive edge on their dealings. While forgetting what their respective companies are there for in the first place – managing financial risks.
As the US Congress’ House Oversight Committee grill the respective CEO s of the three leading credit rating agencies after the state of Connecticut sued them for illegal practices and credit rating abuse. The lawsuit was put forth by Connecticut Attorney General Richard Blumenthal after the US Securities and Exchange Commission (SEC) failed to pursue legal action against the three leading credit rating agencies during the last few years citing lack of resources for the failure to better regulate the credit rating industry.
Various credit rating “sins” scrutinized by the Congressional House Oversight Committee include the practice of notching on rating subprime mortgage backed securities citing the non-competitive nature of such a practice. The quality versus quantity nature of credit ratings – which companies pay on a per-deal approval basis – has come under fire. Especially on how the SEC, investors, the US banking industry and the major players of the global financial system’s perception of such practices as of late. Credit rating agencies are about managing financial risks, not overpaying executives for approving deals. Plus the long-term effects of such dubious practices by the three leading US-based credit rating agencies on accurate financial risk assessment. Will better government regulation of the credit rating industry be the best solution?
Wall Street insiders had been wary about the unsound credit rating practices of Moody’s, S&P, and Fitch in the few years leading up to the global credit crunch. The three leading credit rating agencies dubious practices had colored their credit rating judgement. Some financial insiders even accuse Moody’s of “drinking the Kool Aid” thus endangering millions of dollars circulating in the credit market system.
It’s about time that the US Government reign-in on the excesses and the unsound noncompetitive rating practices of credit rating agencies – especially on notching - because the current financial crisis has banks increasingly de-leveraging – i.e. lending less money to other banks. A practice that could spell financial disaster to our modern credit based economy if allowed to go on for too long. Maybe this overhaul of the credit rating industry will create a thaw on the global credit market to speed up the global economy which as of late is dangerously slowing down into a deep economic recession. For the sake not only of Wall Street but also of Main street as well.
By: Ringo Bones
As of October 22, 2008, America’s three leading credit rating agencies – namely Moody’s, S&P, Fitch – had their respective CEO s testifying on Capitol Hill on the future stake of the credit rating industry. Credit rating agencies came under fire recently due to their dubiously unsound – and sometimes – illegal practices in order to gain competitive edge on their dealings. While forgetting what their respective companies are there for in the first place – managing financial risks.
As the US Congress’ House Oversight Committee grill the respective CEO s of the three leading credit rating agencies after the state of Connecticut sued them for illegal practices and credit rating abuse. The lawsuit was put forth by Connecticut Attorney General Richard Blumenthal after the US Securities and Exchange Commission (SEC) failed to pursue legal action against the three leading credit rating agencies during the last few years citing lack of resources for the failure to better regulate the credit rating industry.
Various credit rating “sins” scrutinized by the Congressional House Oversight Committee include the practice of notching on rating subprime mortgage backed securities citing the non-competitive nature of such a practice. The quality versus quantity nature of credit ratings – which companies pay on a per-deal approval basis – has come under fire. Especially on how the SEC, investors, the US banking industry and the major players of the global financial system’s perception of such practices as of late. Credit rating agencies are about managing financial risks, not overpaying executives for approving deals. Plus the long-term effects of such dubious practices by the three leading US-based credit rating agencies on accurate financial risk assessment. Will better government regulation of the credit rating industry be the best solution?
Wall Street insiders had been wary about the unsound credit rating practices of Moody’s, S&P, and Fitch in the few years leading up to the global credit crunch. The three leading credit rating agencies dubious practices had colored their credit rating judgement. Some financial insiders even accuse Moody’s of “drinking the Kool Aid” thus endangering millions of dollars circulating in the credit market system.
It’s about time that the US Government reign-in on the excesses and the unsound noncompetitive rating practices of credit rating agencies – especially on notching - because the current financial crisis has banks increasingly de-leveraging – i.e. lending less money to other banks. A practice that could spell financial disaster to our modern credit based economy if allowed to go on for too long. Maybe this overhaul of the credit rating industry will create a thaw on the global credit market to speed up the global economy which as of late is dangerously slowing down into a deep economic recession. For the sake not only of Wall Street but also of Main street as well.
Monday, October 20, 2008
On Bank Executives’ Extent of Accountability
The powers-that-be, the media and everyone had been demanding banking executives to be more accountable in their day-to-day dealings, but does this really work in practice?
By: Ringo Bones
Despite the powers-that-be and the media demanding bank executives to be more accountable of their financial / fiscal decisions and actions, we – the average investor – seems not to have any say on the matter. Why? , Because first and foremost bank executives are not placed in their positions by us citizens / voters. A case in point is what if Société Générale clients knew in advance of this year’s most famous rogue trader – Jérôme Kerviel’s intent. Can Société Générale clients threaten the banking board that if they won’t fire Mr. Kerviel, they will take their business – namely their cash deposits, portfolios and other investment instruments – elsewhere? Most likely it is a question of can’t rather than won’t. Like the recent shenanigans at Wall Street that lead to the downfall of Lehman Brothers and the US Government bailout of America's two largest equity loans provider - namely Fannie Mae and Freddie Mac.
Shouldn’t bank executives’ track records – from their C.V. s to their fiscal hits and misses - be made available for public scrutiny so that potential bank clients, investors and depositors can have a semblance of an informed choice – let alone arbitrage - on who will be handling their investment portfolios? Unless you belong to the top echelons of the Saudi Royal Household or if you happen to own a multi-million dollar portfolio forget about it. If it hardly works on our politicians running for public office, then one must try to reacquaint his or herself with the meaning of the words caveat emptor if they ever hope to maintain the economic viability of their respective portfolios during this hard economic times. Because in the real world, accountability ultimately starts and ends with you, the potential client.
By: Ringo Bones
Despite the powers-that-be and the media demanding bank executives to be more accountable of their financial / fiscal decisions and actions, we – the average investor – seems not to have any say on the matter. Why? , Because first and foremost bank executives are not placed in their positions by us citizens / voters. A case in point is what if Société Générale clients knew in advance of this year’s most famous rogue trader – Jérôme Kerviel’s intent. Can Société Générale clients threaten the banking board that if they won’t fire Mr. Kerviel, they will take their business – namely their cash deposits, portfolios and other investment instruments – elsewhere? Most likely it is a question of can’t rather than won’t. Like the recent shenanigans at Wall Street that lead to the downfall of Lehman Brothers and the US Government bailout of America's two largest equity loans provider - namely Fannie Mae and Freddie Mac.
Shouldn’t bank executives’ track records – from their C.V. s to their fiscal hits and misses - be made available for public scrutiny so that potential bank clients, investors and depositors can have a semblance of an informed choice – let alone arbitrage - on who will be handling their investment portfolios? Unless you belong to the top echelons of the Saudi Royal Household or if you happen to own a multi-million dollar portfolio forget about it. If it hardly works on our politicians running for public office, then one must try to reacquaint his or herself with the meaning of the words caveat emptor if they ever hope to maintain the economic viability of their respective portfolios during this hard economic times. Because in the real world, accountability ultimately starts and ends with you, the potential client.
Command Socialist Economy: Wall Street Reinvented?
Will the Bush Administration’s 700 billion US dollar bailout plan forever change the US economy from a free market economy to a tightly government controlled command socialist economy?
By: Ringo Bones
Ever since the eventual approval by the US Congress of the 700 billion dollar economic bail out plan to shore up America’s ailing economy in the wake of the failure of the country’s two largest equity loans provider – namely Fannie Mae and Freddie Mac. Many an opinion of the US Government’s 700 billion dollar economic rescue plan range from comparisons to the Bush Administration’s March 2003 invasion of Iraq - which could eventually result in a “Financial Abu Ghraib”. To the very radical transformation of the fundamental sociological / religious / ideological underpinnings of Wall Street’s perception of what free market capitalism should be.
Ever since Wall Street became a global financial powerhouse, the values that made it work are grounded not only in economist Adam Smith’s idealized version of capitalism. Capitalism that is not only centered on the fundamentals of a free market or laissez-faire economy, but also of the Protestant Work Ethic in which many a filthy-rich American patriot ascribes to the reason why the United States defeated the Soviet Union during the Cold War.
The bad news about free market / laissez-faire capitalism is that unlike Friedrich Nietzsche’s “warrior-poets with enlightened self-interests” of yore - who happen to be very good at self-policing / self-regulating. A laissez-faire economy appears to be unable to regulate itself. That’s why every economist from John Maynard Keynes onwards adopted a policy of government involvement in regulating the fundamentals of the free market economy to avoid it from cycling between the extremes of financial / economic bubbles that will eventually lead into a deep economic depression.
But regulation can also be taken so far. Like the idea of the Socialist Command Economy where only a few people – especially political party cronies – can get very rich. A case in point is one economist visiting the post March 2003 invasion of Iraq had labeled the country’s Saddam Hussein-era economy as a Socialist Command Economy, which – according to him - should be retooled as soon as possible for the good of the country. Though I wonder why Iraq’s crude oil rich neighbor Kuwait had lend 300 billion dollars to Saddam Hussein to fund their war with Iran during the 1980’s given that Socialist Command Economies tend to be given a low credit rating by the world’s leading credit rating agencies.
But isn’t the lack of regulation the root cause of our global financial crisis? Sadly the answer is yes because banks and other financial institutions are prone to adventurism when it comes to making money – i.e. the least effort for the greatest amount of profit. Which eventually is an anathema to the Protestant Work Ethic that everyone at Wall Street embraced in the first place. The easy money in which those who bought in early on credit default swaps, collaterized debt obligations, mortgage backed securities and other very complex financial instruments’ speculative bubble. Financial instruments whose sheer complexity supposedly will generously generate profits on it’s own accord (?), now increasingly looks like a multi-billion dollar pyramid scheme that ran our fragile global economy to the ground. Looks like we now badly need government leadership with the wisdom to distinguish between John Maynard Keynes and Karl Marx.
By: Ringo Bones
Ever since the eventual approval by the US Congress of the 700 billion dollar economic bail out plan to shore up America’s ailing economy in the wake of the failure of the country’s two largest equity loans provider – namely Fannie Mae and Freddie Mac. Many an opinion of the US Government’s 700 billion dollar economic rescue plan range from comparisons to the Bush Administration’s March 2003 invasion of Iraq - which could eventually result in a “Financial Abu Ghraib”. To the very radical transformation of the fundamental sociological / religious / ideological underpinnings of Wall Street’s perception of what free market capitalism should be.
Ever since Wall Street became a global financial powerhouse, the values that made it work are grounded not only in economist Adam Smith’s idealized version of capitalism. Capitalism that is not only centered on the fundamentals of a free market or laissez-faire economy, but also of the Protestant Work Ethic in which many a filthy-rich American patriot ascribes to the reason why the United States defeated the Soviet Union during the Cold War.
The bad news about free market / laissez-faire capitalism is that unlike Friedrich Nietzsche’s “warrior-poets with enlightened self-interests” of yore - who happen to be very good at self-policing / self-regulating. A laissez-faire economy appears to be unable to regulate itself. That’s why every economist from John Maynard Keynes onwards adopted a policy of government involvement in regulating the fundamentals of the free market economy to avoid it from cycling between the extremes of financial / economic bubbles that will eventually lead into a deep economic depression.
But regulation can also be taken so far. Like the idea of the Socialist Command Economy where only a few people – especially political party cronies – can get very rich. A case in point is one economist visiting the post March 2003 invasion of Iraq had labeled the country’s Saddam Hussein-era economy as a Socialist Command Economy, which – according to him - should be retooled as soon as possible for the good of the country. Though I wonder why Iraq’s crude oil rich neighbor Kuwait had lend 300 billion dollars to Saddam Hussein to fund their war with Iran during the 1980’s given that Socialist Command Economies tend to be given a low credit rating by the world’s leading credit rating agencies.
But isn’t the lack of regulation the root cause of our global financial crisis? Sadly the answer is yes because banks and other financial institutions are prone to adventurism when it comes to making money – i.e. the least effort for the greatest amount of profit. Which eventually is an anathema to the Protestant Work Ethic that everyone at Wall Street embraced in the first place. The easy money in which those who bought in early on credit default swaps, collaterized debt obligations, mortgage backed securities and other very complex financial instruments’ speculative bubble. Financial instruments whose sheer complexity supposedly will generously generate profits on it’s own accord (?), now increasingly looks like a multi-billion dollar pyramid scheme that ran our fragile global economy to the ground. Looks like we now badly need government leadership with the wisdom to distinguish between John Maynard Keynes and Karl Marx.
Saturday, September 20, 2008
Exchange Traded Funds: The Ideal Investment Vehicle?
Ever since it’s ad hoc genesis in 1989, exchange-traded funds or ETF s has been seen by many as the most innovative investment vehicle of the last two decades. But are ETF s too good to be true in the face of our current global economic slowdown?
By: Ringo Bones
Recently hailed by a number of investment savvy as one of the methods that made them profit from the sky-is-the-limit crude oil prices of July 2008, crude oil ETF s really paid their investors rich dividends. But is this just a case of Emperor Nero fiddling away while Rome burned to the ground thus forever reinforcing the notion that our current global financial system can only thrive in an environment of extreme financial disparity? To find out if ETF s truly deserving of this reputation, let us first examine what makes them tick.
An exchange-traded fund or ETF is an investment vehicle traded on the world’s stock exchanges, much like stocks or bonds. A typical ETF holds assets such as stocks or bonds by trading them at approximately the same price as the net asset value of its underlying assets over the course of the trading day. Majority of ETF s are valued by pegging or tracking at an index, such as the DOW Jones Industrial Average or the S&P 500. An ETF is seen by many as attractive investments because of its low costs, tax efficiency, and stock-like features.
An ETF combines the valuation feature of existing mutual funds or unit investment trusts, which can be purchased or redeemed at the end of each trading day for its net asset value. Close-end funds are not considered to be exchange-traded funds, even though they are funds and are traded on an exchange. In general, ETF s will not require a lot of micro-management. You can simply set them up and forget them and then rake in the dividends. In fact, some investors take this to the extreme by building so-called “lazy portfolios”.
A poll was conducted on a group of investment professionals in March 2008. 67% of those polled say that ETF s are the most innovative investment vehicle developed during the last two decades, while 60% reported that ETF s have fundamentally changed the way investment professionals constructed investment portfolios.
ETF s had their ad hoc origins in 1989 with Index Participation Shares, which - for all intents and purposes - was an S&P 500 proxy that traded on the American Stock Exchange and the Philadelphia Stock Exchange. This product, however, was short-lived after a lawsuit by the Chicago Mercantile Exchange was successful in halting the sales of ETF s in the United States. A similar product, Toronto Index Participation Shares started trading on the Toronto Stock Exchange in 1990. The shares, which pegged the TSE 35 and later the TSE 100 stocks, proved to be so popular. The popularity of these products led the American Stock Exchange to try to develop something that would comply with Securities and Exchange Commission or SEC regulation to be sold on US soil.
ETF s had been available in the US since 1993 and in Europe in 1999. Exchange traded funds have traditionally been classified as index funds. But in 2008, the US Securities and Exchange Commission started to authorize the creation of actively-managed ETF s. Usually investors only buy and sell ETF s in market transactions. But institutional investors can redeem large blocks of shares of the ETF – known as creation units – for a “basket” of the underlying assets or alternatively, exchange the underlying assets for creation units. This creation and redemption of shares enables institutions to engage in arbitrage that causes the value of the ETF to approximate the net asset value of the underlying assets.
Exchange-traded funds offer public investors’ undivided interests in a pool of securities and other assets and thus are similar in many ways to traditional mutual funds. Except shares in an ETF can be bought and sold throughout the trading day like stocks on a securities exchange through a broker-dealer. Unlike traditional mutual funds, ETF s does not sell or redeem their individual shares at net asset value (NAV). Instead, financial institutions purchase and redeem ETF shares directly from the ETF. But only in large blocks that vary in size from 25,000 to 200,000 shares called “creation units”. Purchase and redemption of creation units are generally in kind. With the institutional investor contributing or receiving a basket of securities of the same type and proportion held by the ETF. Although some ETF s may require or allow purchasing or redeeming shareholders to substitute cash for some - or all - of the securities in the basket of assets.
The ability to purchase and redeem creation units gave ETF s an arbitrage mechanism intended to minimize the potential deviation between the market price and the net asset value of ETF shares. Existing ETF s have transparent portfolios, so institutional investors will know exactly what portfolio assets they must assemble if they wish to purchase a creation unit. And the exchange disseminates the updated net asset value of the shares throughout the trading day, typically at 15-second intervals.
In practice, many experts have viewed exchange-traded funds with mixed feelings. John C. Bogle, founder of The Vanguard Group, which is a leading issuer of index funds and – since Bogle’s retirement – of ETF s. Bogle has argued that ETF s are nothing more than a representation of short-term speculation because their trading expenses decrease returns to investors. And also, ETF s provides insufficient diversification. But Bogle later concedes that a broadly diversified ETF that is held over time can be a good investment.
But major investing institutions, like The Vanguard Group or Fidelity Investments for example, already control billions of shares. It is easy for them to create an ETF by simply peeling a few million shares off the top of the pile. Then putting together a basket of stocks to represent the appropriate index, say the NASDAQ composite or the TBOPP index made up for the start-up article. Does this serve as proof that patience and prudence together with a good perspective on the marketplace is still the cornerstone of a good and profitable business model then?
By: Ringo Bones
Recently hailed by a number of investment savvy as one of the methods that made them profit from the sky-is-the-limit crude oil prices of July 2008, crude oil ETF s really paid their investors rich dividends. But is this just a case of Emperor Nero fiddling away while Rome burned to the ground thus forever reinforcing the notion that our current global financial system can only thrive in an environment of extreme financial disparity? To find out if ETF s truly deserving of this reputation, let us first examine what makes them tick.
An exchange-traded fund or ETF is an investment vehicle traded on the world’s stock exchanges, much like stocks or bonds. A typical ETF holds assets such as stocks or bonds by trading them at approximately the same price as the net asset value of its underlying assets over the course of the trading day. Majority of ETF s are valued by pegging or tracking at an index, such as the DOW Jones Industrial Average or the S&P 500. An ETF is seen by many as attractive investments because of its low costs, tax efficiency, and stock-like features.
An ETF combines the valuation feature of existing mutual funds or unit investment trusts, which can be purchased or redeemed at the end of each trading day for its net asset value. Close-end funds are not considered to be exchange-traded funds, even though they are funds and are traded on an exchange. In general, ETF s will not require a lot of micro-management. You can simply set them up and forget them and then rake in the dividends. In fact, some investors take this to the extreme by building so-called “lazy portfolios”.
A poll was conducted on a group of investment professionals in March 2008. 67% of those polled say that ETF s are the most innovative investment vehicle developed during the last two decades, while 60% reported that ETF s have fundamentally changed the way investment professionals constructed investment portfolios.
ETF s had their ad hoc origins in 1989 with Index Participation Shares, which - for all intents and purposes - was an S&P 500 proxy that traded on the American Stock Exchange and the Philadelphia Stock Exchange. This product, however, was short-lived after a lawsuit by the Chicago Mercantile Exchange was successful in halting the sales of ETF s in the United States. A similar product, Toronto Index Participation Shares started trading on the Toronto Stock Exchange in 1990. The shares, which pegged the TSE 35 and later the TSE 100 stocks, proved to be so popular. The popularity of these products led the American Stock Exchange to try to develop something that would comply with Securities and Exchange Commission or SEC regulation to be sold on US soil.
ETF s had been available in the US since 1993 and in Europe in 1999. Exchange traded funds have traditionally been classified as index funds. But in 2008, the US Securities and Exchange Commission started to authorize the creation of actively-managed ETF s. Usually investors only buy and sell ETF s in market transactions. But institutional investors can redeem large blocks of shares of the ETF – known as creation units – for a “basket” of the underlying assets or alternatively, exchange the underlying assets for creation units. This creation and redemption of shares enables institutions to engage in arbitrage that causes the value of the ETF to approximate the net asset value of the underlying assets.
Exchange-traded funds offer public investors’ undivided interests in a pool of securities and other assets and thus are similar in many ways to traditional mutual funds. Except shares in an ETF can be bought and sold throughout the trading day like stocks on a securities exchange through a broker-dealer. Unlike traditional mutual funds, ETF s does not sell or redeem their individual shares at net asset value (NAV). Instead, financial institutions purchase and redeem ETF shares directly from the ETF. But only in large blocks that vary in size from 25,000 to 200,000 shares called “creation units”. Purchase and redemption of creation units are generally in kind. With the institutional investor contributing or receiving a basket of securities of the same type and proportion held by the ETF. Although some ETF s may require or allow purchasing or redeeming shareholders to substitute cash for some - or all - of the securities in the basket of assets.
The ability to purchase and redeem creation units gave ETF s an arbitrage mechanism intended to minimize the potential deviation between the market price and the net asset value of ETF shares. Existing ETF s have transparent portfolios, so institutional investors will know exactly what portfolio assets they must assemble if they wish to purchase a creation unit. And the exchange disseminates the updated net asset value of the shares throughout the trading day, typically at 15-second intervals.
In practice, many experts have viewed exchange-traded funds with mixed feelings. John C. Bogle, founder of The Vanguard Group, which is a leading issuer of index funds and – since Bogle’s retirement – of ETF s. Bogle has argued that ETF s are nothing more than a representation of short-term speculation because their trading expenses decrease returns to investors. And also, ETF s provides insufficient diversification. But Bogle later concedes that a broadly diversified ETF that is held over time can be a good investment.
But major investing institutions, like The Vanguard Group or Fidelity Investments for example, already control billions of shares. It is easy for them to create an ETF by simply peeling a few million shares off the top of the pile. Then putting together a basket of stocks to represent the appropriate index, say the NASDAQ composite or the TBOPP index made up for the start-up article. Does this serve as proof that patience and prudence together with a good perspective on the marketplace is still the cornerstone of a good and profitable business model then?
Wednesday, August 20, 2008
Crude Oil-Based Economics: Still Economically Viable?
After the high energy prices of July 2008 has done it’s worst to our fragile global economy still reeling from the credit crunch, will the present under 115 dollar-per-barrel crude oil prices be a viable long-term solution?
By: Vanessa Uy
Now that the furor over high-energy prices has (hopefully?) died down, does this mean the worse of the energy crisis is now far behind us? Well, not exactly. The crude oil prices which are steadily declining (hopefully)on a weekly basis is by no means immune from the Machiavellian-like machinations of commodities speculators, less than democratic nation-states, and most of all OPEC.
Throughout of its 47-year history, the Organization of the Petroleum Exporting Countries or OPEC has been a cartel in name only. Given that the people who still care about OPEC’s historical track-record probably experienced first hand back in the time when gasoline was still sold at 10 US cents or 25 US cents per gallon, probably compares it to some post-Pablo Escobar narcotics cartel. Forever endangering the democratically elected governments of Latin American countries by financing local terror groups. The question now is, is OPEC really like a narcotics cartel devoid of any semblance of Corporate Social Responsibility?
Sadly, this was proven back in the March 2008 OPEC meeting in Vienna. OPEC member oil companies declined to increase their production quotas despite fairly legitimate reasons to do so. At this time, crude oil prices were teetering just above 100 US dollars a barrel. Plus, the United States is either near or already in an economic recession with much of the rest of the world feeling the knock-on effects. OPEC ministers were nonchalant despite of the dire situation of our global economy back then. The OPEC ministers even choose to a consensus of reducing overall production because the inevitable global economic slowdown will probably reduce crude oil demand anyway. Is there something wrong with this picture?
What is wrong is that a fall in crude oil prices is one of – if not the main – mechanisms in which an economic recession or retail slowdown corrects itself. As crude oil prices now a mere shadow, relatively speaking, of its almost 150 US dollar a barrel peak back in July 2008, the US economy did got a little better. Despite the housing market still at a slowdown, everyone at the US Federal Reserve must had patted themselves in the back for formulating a monetary policy that saved the US economy – i.e. it strengthened back the US dollar. But the question now is, can we keep crude oil prices under 100 US dollars a barrel until the year 2050 were economically viable alternatives to crude oil fueled systems will be invented?
The problem with this scenario is that replacement technologies for our crude oil incumbent industry will never be invented if the economic incentives for doing so are not there. Despite the environmental harm, not to mention the political instability plus the cost in human lives of our young people in their prime dying in some senseless war just to keep crude oil prices artificially low. Our Quixotic search for cheap crude oil is one of the main stumbling blocks for the development and implementation of environmentally renewable energy technologies like solar photovoltaic cells and wind turbines. Imagine if Halliburton and their ilk were around back during the days of the Amistad Case. The whole world would probably still be engaged in the Transatlantic slave trade and using whale blubber to run our cars, heat our homes, and generate electricity.
For the sake of the global economy, America – the world’s last true superpower – must take the lead in developing new technologies to free the whole world being shackled to a crude oil incumbent economy. Or are the policymakers on Capitol Hill too blind to see that America's addiction to foreign (especially OPEC’s) crude oil has made the US economy a virtual mendicant to every other country’s Sovereign Wealth Funds. Plus, the present US Government can’t even provide justice to the genocide victims in Darfur, Sudan because the US Government borrows money from one of the perpetrators – i.e. Beijing Government – just to buy America’s present crude oil needs from OPEC.
By: Vanessa Uy
Now that the furor over high-energy prices has (hopefully?) died down, does this mean the worse of the energy crisis is now far behind us? Well, not exactly. The crude oil prices which are steadily declining (hopefully)on a weekly basis is by no means immune from the Machiavellian-like machinations of commodities speculators, less than democratic nation-states, and most of all OPEC.
Throughout of its 47-year history, the Organization of the Petroleum Exporting Countries or OPEC has been a cartel in name only. Given that the people who still care about OPEC’s historical track-record probably experienced first hand back in the time when gasoline was still sold at 10 US cents or 25 US cents per gallon, probably compares it to some post-Pablo Escobar narcotics cartel. Forever endangering the democratically elected governments of Latin American countries by financing local terror groups. The question now is, is OPEC really like a narcotics cartel devoid of any semblance of Corporate Social Responsibility?
Sadly, this was proven back in the March 2008 OPEC meeting in Vienna. OPEC member oil companies declined to increase their production quotas despite fairly legitimate reasons to do so. At this time, crude oil prices were teetering just above 100 US dollars a barrel. Plus, the United States is either near or already in an economic recession with much of the rest of the world feeling the knock-on effects. OPEC ministers were nonchalant despite of the dire situation of our global economy back then. The OPEC ministers even choose to a consensus of reducing overall production because the inevitable global economic slowdown will probably reduce crude oil demand anyway. Is there something wrong with this picture?
What is wrong is that a fall in crude oil prices is one of – if not the main – mechanisms in which an economic recession or retail slowdown corrects itself. As crude oil prices now a mere shadow, relatively speaking, of its almost 150 US dollar a barrel peak back in July 2008, the US economy did got a little better. Despite the housing market still at a slowdown, everyone at the US Federal Reserve must had patted themselves in the back for formulating a monetary policy that saved the US economy – i.e. it strengthened back the US dollar. But the question now is, can we keep crude oil prices under 100 US dollars a barrel until the year 2050 were economically viable alternatives to crude oil fueled systems will be invented?
The problem with this scenario is that replacement technologies for our crude oil incumbent industry will never be invented if the economic incentives for doing so are not there. Despite the environmental harm, not to mention the political instability plus the cost in human lives of our young people in their prime dying in some senseless war just to keep crude oil prices artificially low. Our Quixotic search for cheap crude oil is one of the main stumbling blocks for the development and implementation of environmentally renewable energy technologies like solar photovoltaic cells and wind turbines. Imagine if Halliburton and their ilk were around back during the days of the Amistad Case. The whole world would probably still be engaged in the Transatlantic slave trade and using whale blubber to run our cars, heat our homes, and generate electricity.
For the sake of the global economy, America – the world’s last true superpower – must take the lead in developing new technologies to free the whole world being shackled to a crude oil incumbent economy. Or are the policymakers on Capitol Hill too blind to see that America's addiction to foreign (especially OPEC’s) crude oil has made the US economy a virtual mendicant to every other country’s Sovereign Wealth Funds. Plus, the present US Government can’t even provide justice to the genocide victims in Darfur, Sudan because the US Government borrows money from one of the perpetrators – i.e. Beijing Government – just to buy America’s present crude oil needs from OPEC.
Friday, July 25, 2008
Hedging for Crude Oil: An Unfair Leverage?
Even though the latest peak price for crude oil is still a tad under $150 before retreating a bit, this wild price swing has already done its damage to the global economy. The question now is; is the blame – like the crude – still plentiful to go around?
By: Vanessa Uy
Many factors are supposedly blamed for our current middle of 2008 high price of crude oil. From simple supply depletion (we are using up our “known” oil reserves at a rate of 8% annually at our current rate of consumption), to the “supposedly” increased demand from newly emerging economic powerhouses like China and India. Add to that the perennial issue of Geopolitical Instability thus making all of us eternally gullible to the excuses of the crude oil conglomerates’ reasons for jacking-up their prices once again. As of late, economists around the world seem to have reached a consensus that at least 60% of our current price of crude oil is due to unregulated futures speculation by hedge funds, banks, and other financial institutions. Which Capitol Hill counters yet again with a counter blame pointed squarely at OPEC and our present “Geopolitical Instability” - courtesy of the Bush Administrations’ Neo-Conservatives, Halliburton, and their ilk.
Speculation of commodities’ prices – especially crude oil – is not new. It’s been around since Wall Street opened for business. But it is always viewed by many with suspicion because it’s as far removed as a self-policing corporate entity with enlightened self-interests as it can get. Hedge funds are used in unregulated futures speculation by banks and other financial institutions using the London International Commodities Exchange (ICE) Futures and the New York Mercantile Exchange (NYMEX) futures exchanges. Add to that the uncontrolled inter-bank or “Over – the - Counter” trading to avoid regulatory scrutiny. Thus making the US margin rules of the government’s Commodity Futures Trading Commission that allows speculators – via a regulatory loophole – to buy a crude oil futures contract on the NYMEX by just having to pay 6% of the value of the contract. The “somewhat questionable” margin rules had recently fed the skyrocketing crude oil price frenzy, especially if you consider the unfair 16 –to- 1 leverage, which left us – the average consumer – holding the bag. Sadly, government regulators around the world are powerless to address the “apparent” injustice.
Luckily, this extremely large leverage of 16-to-1 that had driven our current crude oil prices to wildly unrealistic levels have been a “Godsend” to various petroleum companies and various financial institutions whether these firms admit it or not. As of late, high crude oil prices had become a valuable tool for these firms to offset financial losses incurred since the September 11, 2001 terrorist attacks and the more recent sub-prime mortgage debacle. Given the mainstream perception that “market forces” are inherently good and self-policing, does this mean that there is a “method” to this skyrocketing crude oil price “madness”? Meaning who among us in their right mind would easily assume that the multinational petroleum conglomerates would be inclined to practice corporate social responsibility every time these conglomerates’ profit margins go through the roof? - Definitely not me.
One “perceptual construct” of the GOP and oil lobbyists -run policymakers of Washington DC and also of the phobophobic mammon peddlers running Wall Street frequently used to justify our skyrocketing crude oil prices is the this “Hoax of Peak Oil”. The “Hoax of Peak Oil” is this perceptual construct of scant proof citing crude oil production has reached a point when more than half of all our global reserves have been used up. Thus forming a conclusion with no proof whatsoever that the world is already on the wrong side of the “Bell Curve” when it comes to plentiful and cheap crude. Not only is this idea been used to swindle the average consumer from our hard-earned cash but also sacrificed countless young men and women around the world in the prime of their lives in the name of “crude oil supply security”.
Many economists around the globe have now questioned the Industrial World’s inability to transition away from “petroleum incumbency”. More than half of them, are now weary that the recent speculative bubble in crude oil – which has gone asymptotic since January 2008 – is about to go pop. Sadly, crude oil might have to reach the $500 per barrel price before this bubble will burst or the “Industrialized West” embraces alternative energy – whichever comes first. Probably because of unscrupulous speculators and futures’ traders paroxysm (i.e. sudden violent emotion or action) against the increasingly rave reports on Fortune and The Economist about renewable energy – like wind and solar – receiving big time venture capital investments since 2005.
History has told us since the Exxon Valdez disaster of 1989 and the August 1990 invasion of Kuwait by Iraqi strongman Saddam Hussein that we must move on from our unsustainable “Petroleum Incumbent” transportation and energy systems with ever increasing urgency. Our crude oil addiction is just simply unsustainable. Not just in terms of preserving a healthy environment, a dynamic and equitable economy, but also of the high cost in human lives as well that the global crude oil conglomerates seem to continue to overlook.
By: Vanessa Uy
Many factors are supposedly blamed for our current middle of 2008 high price of crude oil. From simple supply depletion (we are using up our “known” oil reserves at a rate of 8% annually at our current rate of consumption), to the “supposedly” increased demand from newly emerging economic powerhouses like China and India. Add to that the perennial issue of Geopolitical Instability thus making all of us eternally gullible to the excuses of the crude oil conglomerates’ reasons for jacking-up their prices once again. As of late, economists around the world seem to have reached a consensus that at least 60% of our current price of crude oil is due to unregulated futures speculation by hedge funds, banks, and other financial institutions. Which Capitol Hill counters yet again with a counter blame pointed squarely at OPEC and our present “Geopolitical Instability” - courtesy of the Bush Administrations’ Neo-Conservatives, Halliburton, and their ilk.
Speculation of commodities’ prices – especially crude oil – is not new. It’s been around since Wall Street opened for business. But it is always viewed by many with suspicion because it’s as far removed as a self-policing corporate entity with enlightened self-interests as it can get. Hedge funds are used in unregulated futures speculation by banks and other financial institutions using the London International Commodities Exchange (ICE) Futures and the New York Mercantile Exchange (NYMEX) futures exchanges. Add to that the uncontrolled inter-bank or “Over – the - Counter” trading to avoid regulatory scrutiny. Thus making the US margin rules of the government’s Commodity Futures Trading Commission that allows speculators – via a regulatory loophole – to buy a crude oil futures contract on the NYMEX by just having to pay 6% of the value of the contract. The “somewhat questionable” margin rules had recently fed the skyrocketing crude oil price frenzy, especially if you consider the unfair 16 –to- 1 leverage, which left us – the average consumer – holding the bag. Sadly, government regulators around the world are powerless to address the “apparent” injustice.
Luckily, this extremely large leverage of 16-to-1 that had driven our current crude oil prices to wildly unrealistic levels have been a “Godsend” to various petroleum companies and various financial institutions whether these firms admit it or not. As of late, high crude oil prices had become a valuable tool for these firms to offset financial losses incurred since the September 11, 2001 terrorist attacks and the more recent sub-prime mortgage debacle. Given the mainstream perception that “market forces” are inherently good and self-policing, does this mean that there is a “method” to this skyrocketing crude oil price “madness”? Meaning who among us in their right mind would easily assume that the multinational petroleum conglomerates would be inclined to practice corporate social responsibility every time these conglomerates’ profit margins go through the roof? - Definitely not me.
One “perceptual construct” of the GOP and oil lobbyists -run policymakers of Washington DC and also of the phobophobic mammon peddlers running Wall Street frequently used to justify our skyrocketing crude oil prices is the this “Hoax of Peak Oil”. The “Hoax of Peak Oil” is this perceptual construct of scant proof citing crude oil production has reached a point when more than half of all our global reserves have been used up. Thus forming a conclusion with no proof whatsoever that the world is already on the wrong side of the “Bell Curve” when it comes to plentiful and cheap crude. Not only is this idea been used to swindle the average consumer from our hard-earned cash but also sacrificed countless young men and women around the world in the prime of their lives in the name of “crude oil supply security”.
Many economists around the globe have now questioned the Industrial World’s inability to transition away from “petroleum incumbency”. More than half of them, are now weary that the recent speculative bubble in crude oil – which has gone asymptotic since January 2008 – is about to go pop. Sadly, crude oil might have to reach the $500 per barrel price before this bubble will burst or the “Industrialized West” embraces alternative energy – whichever comes first. Probably because of unscrupulous speculators and futures’ traders paroxysm (i.e. sudden violent emotion or action) against the increasingly rave reports on Fortune and The Economist about renewable energy – like wind and solar – receiving big time venture capital investments since 2005.
History has told us since the Exxon Valdez disaster of 1989 and the August 1990 invasion of Kuwait by Iraqi strongman Saddam Hussein that we must move on from our unsustainable “Petroleum Incumbent” transportation and energy systems with ever increasing urgency. Our crude oil addiction is just simply unsustainable. Not just in terms of preserving a healthy environment, a dynamic and equitable economy, but also of the high cost in human lives as well that the global crude oil conglomerates seem to continue to overlook.
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