We all know that in Wall street these days some very rich people are becoming somewhat less rich due to some technical corrections. I tried explaining to my wife how the whole process is unraveling but I failed when it came to details.
Thankfully we have smart folks like Roubini to convert all that CNBC-breathlessness into layman language -
First, you take a bunch of shaky and risky subprime mortgages and repackage them into residential mortgage backed securities (RMBS); then you repackage these RMBS in different (equity, mezzanine, senior) tranches of cash CDOs that receive a misleading investment grade rating by the credit rating agencies; then you create synthetic CDOs out of the same underlying RMBS; then you create CDOs of CDOs (or squared CDOs) out of these CDOs; and then you create CDOs of CDOs of CDOs (or cubed CDOs) out of the same murky securities; then you stuff some of these RMBS and CDO tranches into SIV (structured investment vehicles) or into ABCP (Asset Backed Commercial Paper) or into money market funds. Then no wonder that eventually people panic and run - as they did yesterday – on an apparently “safe” money market fund such as Sentinel. That “toxic waste” of unpriceable and uncertain junk and zombie corpses is now emerging in the most unlikely places in the financial markets.
Reason , why I failed to convincingly explain to my wife, was that I was using two cows theory and finished with a statement that these spreadsheet-ninjas are really trying to get milk out of bunch of bulls.
Try searching on Wikipedia for “The asset-driven economy” and see what you get.
When too many new terms start showing up and then probably its time to fine tune your BS detector. Asset-driven economy, Ponzi finance, ARM’s way and what not.
It’s roosting time!
It’s plain economics which is freaking out everybody:
The average American has an income of about $40,000 a year and has, as
we have seen, a personal savings rate of zero. The average Chinese
earns around $1,500 per year but has personal savings of 23 percent of
his income — and is lending a large chunk of these savings, via the
People’s Bank of China, to the average American.
Sum of all fears nicely packaged by Niall Ferguson (Harvard professor of history).
This analysis is less painful compared to the lacklustre display by Donovan and company against the Czechs. Never seen any other American sports team lacking so much in winning attitude.
Stephen Roach is at his ominous best (or worst). It seems the reality of wonder called Internet is hitting him again and again. To the extent that now Internet can be blamed for something Stalin and Marx together couldn’t do ie finding holes in the market economy. Sample what he has to say:
The toughest part of this story is that there may be no easy way out.
That’s because there is an important new wrinkle in the equation –
the most disruptive technology in the modern history of the world. The Internet has changed the rules of engagement for globalization. It has revolutionized the logistics of supply chain management, accelerating the diffusion of global manufacturing platforms. But perhaps even more importantly, e-based connectivity has introduced the possibility of offshore outsourcing and wage compression in once nontradable services industries. Five years ago, the globalization of the information function was confined to call centers and data processing. Courtesy of the Internet, those pressures have migrated quickly to the
upper end of the value chain, bearing down on workers in software
programming, engineering, design, and the medical profession, as well
as a broad array of professionals in the legal, accounting, actuarial,
consulting, and financial services industries.
Nothing surprising there for those who are glued on memeorandum for their daily caffeine. Before leaving for India I was having dinner with friends and I made one statement which kind of overstated the importance of Internet in driving the shape of future events. I guess I may not have overstated that much.
Our forecasting genes still belong to the pre-Internet era so once in a while we also get surprised when we find that yes future is here but we are not part of it’s geographical distribution. So next time you catch yourself saying “it will happen in x years” do realize that somewhere in the world that will sound like “it will happen in x months”.
As Roach coach signs off with the final burst:
Like it or not, IT-enabled globalization has unexpectedly tilted the playing field.
(Via HBS) Ronald Cohen is about to start new venture aimed at social investment. Another highly successful venture capitalist - Vinod Khosla is also pursuing social entrepreneuership actively.
This is more than just philanthropy, its a deep realization that the traditional capitalism is hitting its limits and will not work in the larger part of the world. New model is required which will be based on micro-credit, equality of opportunity and sustainable resource consumption.
Warren Buffet (link via Rajesh) has few interesting one-line advice for next generation investors:
..I asked him what he wanted to do for his career, and he replied that he wanted to go into a particular field, but thought he should work for McKinsey for a few years first to add to his resume. To me that’s like saving sex for your old age. It makes no sense.
Too much intelligence and energy is being devoted to scraping the crumbs off the table of capitalism instead of preparing the meal.
This focus on preparing the meal is what is driving his daily work routine. In WSJ coverage he explains why he prefers keeping everything very simple-
I don’t use analysts or fortune tellers. If I had to pick one, I don’t know which it would be
His parting line about time it takes to make an investment decision will surely make Gladwell very happy -
If I don’t know it in five to 10 minutes, then I’m not going to know it in 10 weeks
A thin-slicer ? You decide.
Numbers are pretty big -
Mortgage brokers, virtually nonexistent 25 years ago, now number 400,000 workers at more than 50,000 firms. They are scrappy entrepreneurs and sales representatives who match up borrowers and lenders on roughly 7 out of 10 mortgages. This year, they will collect some $33 billion from their share of an estimated $2.8 trillion in home mortgages.
Was talking to a realtor recently and he sounded very sober about the coming slow-down.
This whole sector is about to cool off.
So my friend lost a half a million dollar worth deal to some Chinese textile supplier. Naturally he is not happy about it and thats not because he has anything against Chinese. In fact he is all mad against the buyer - supposedly some upscale French department store. Point is where do you draw the line on the low cost graph. You can always find someone willing to cut prices in half to build their reference account !
Low cost argument works only so far as the margins can be protected. Margins need volume. So the theory goes. In a commodity market invariably volume players dominate. In the software sector India can maintain it’s low cost position because of good supply of developers and same applies for Chinese manufacturing strength. More hands, more volume and hence more resilience in the discounting game.
So what do you suggest to a friend who is not THAT big yet. He is a successful small business player and now feeling the low cost pinch. Only way out is to innovate and get out of the low cost game. Easier said than done in the slow moving garment manufacturing sector. At least software still allows garage level tinkering !
While listening to his stories I couldn’t stop comparing it with whats happening in the software sector. Where every now and then some new consulting company shows up and is willing to deeply discount the deal.
For the sake of comparison:
Penn cited an article in The Economist and reported that the total
value of residential property in developed countries had risen by more
than $30 trillion over the past five years, to $70 trillion, an
increase equivalent to 100 percent of those countries’ combined GDPs.
Penn went on to say that such rapid growth dwarfed the global
stock market bubble of the late 1990s which demonstrated an increase
over five years at 80 percent of GDP, and the Wall Street crash (55
percent of GDP). Penn also observed that the stock market crash of 2000
triggered a 32 percent decline in the semiconductor market in 2001.
