See i believe in money, power and respect...
It's the key to life
Money power respect
That you need in life
Money power respect
You'll be eatin' right
Money power respect
You can sleep at night
You'll see the light
It's the key to life
--Lil' Kim from Money, Power Respect
I am a big proponent of truth at all costs. To the question, “can you handle the truth,” I always answer, “yes, we can handle the truth!” But then sometimes, it may be, that once we know the truth, we are better served to just forget it. Lil' Kim's keys to life are nothing but myths, but, maybe it's good to believe. Sometimes.
(1) You can change the World!
Okay, forget what Time Magazine told you in 2006 (btw: they are on their way out of business). Of course you can not change the world! Obama can't change the world. Even these people have less power than we think (Forbes 400). We each are tiny, powerless, and no more or less potential to influence than anyone else. For everything we try to do, someone will try to do something different.
Still, that way of thinking gets us no-where. With everything you do (or don't do) imagine all 6.7 billion of the rest of us doing or not doing the same thing. It adds up. Also, if you act as if you have all the power in the world, a surprising number of people will actually believe you. If you believe in this myth and then others start to believe.... then, suddenly you are a mighty powerful force. Think small and act big.
(2) $$$$$$
[for those among us who are not actively investing our money: please continue reading all the way to the end]
Yes, Money is a Myth; we all know this. It is paper and tin* coins whose most valuable asset is our collective belief in its (constantly changing) value. It amazes me that some people are willing to murder, steal, and trade their personal integrity in bribe all to get a few extra leafs of these germ-laden lies. Looks like, the joke is on you, Madoff! Ha. ha… hmm.
It also amazes me how easily we all seem to wrap our brains around this myth: believing in money is like believing in an inch or a centimeter only every day someone (the market) convinces us to accept a new length for the same inch. Yesterday a dollar was that, today it’s just a little bit less and we move on. It’s incredible.
And now Paper Money has become its own ancient myth. As you know, the Federal Reserve Bank did not actually print new money to bail out the economy, it simply added zeroes to some vault-secured (I hope!) Excel workbook. I myself barely remember what cash looks like.
So why do we believe in this myth? Okay, I don’t need to say too much here: the alternative is bartering with real assets: I’ll trade you 20 Pokemon dragons for one Slurpee. We can all envision the mess.
NOW: To those of you who think the stock market is a joke, I'm with you. I do not trust corporations and I understand very little about the futures of stocks and hedges ….or the hedged futures of stock swaps… and, wait, forget stocks, can we just swap futures instead?...Anyway! The world of high finance and corporate charading is, quite frankly, silly. BUT it is no more of a lie than money itself.
In spite of some occasional blips, the values of business investments rise over time. Remember, fraud and schemers aside, most stocks and funds are tied to real businesses, real assets, energy plants in Montana that are generating more value every day. The stock market tends to rise over time while the value of currency is constantly eroded by inflation (that dollar that bought you a pack of cigarettes 15 years ago, won't even buy you a smoke today). If all you’ve got is cash, you’re going to have a lot less of everything tomorrow. Those who have will get and those who get are--- well, most often white. And their parents before them were white. And Santa Clause is also … white.
Don't get the wrong idea, the stock market is not a conspiracy but it isn’t magic either. No-one out there understands any more about it than you do. So here’s my bottom-line on the money myth: don’t kill for it, don’t freak if you loose some, but do play along! Myths are inflated by rules, so do some research and think long-term. The world is full of fake money, don’t you want some too?!
And finally, while I can reject my love of truth and embrace myths 1 & 2, this final myth, I believe, must be broken:
(3) YOU!!
Yes, even You are a myth. You are 100% made-up. Some bizarre amalgamation of your parent’s (mis-)teachings, genetic pre-dispositions, and chance life experiences of getting on one bus instead of another. Maybe there is some magnet of fate guiding this mess but we will never know (and if such a guiding force does exist, it may very well be Nike, J.Crew and Dwell Magazine pulling your strings… maybe God is at the top of the food chain and he pulls the corporate strings? Who knows!). In any event, you are completely free to be you! And everything you think you know about who you are can change on the instant. So break this myth and take singing lessons, man-up and tell your snot-nosed teenager to get a job, get a job yourself, practice patience instead of road-rage; practice road-rage instead of patience; just stop, stretch and grow! You are not who you think you are.
Showing posts with label Bubbles. Show all posts
Showing posts with label Bubbles. Show all posts
Thursday, August 13, 2009
Tuesday, August 11, 2009
Risky Bubbles
Today's question: Do we have a risk bubble that is yet to burst?
By RISK, I am not talking about the game of global domination, I am talking about the industry for pricing (ie. Moodies, S&P, bank underwriters), managing (real best practices in the work place), mitigating (carefully crafted disclosure statements written by attorneys), selling (by companies who engage in known risks), and buying (in some form or another, all of us) of exposure to the chance of financial loss.
By BUBBLE we can imagine a child's game of blowing bubbles; sometimes we get big bubbles, sometimes we get little bubbles, whatever. What I wonder is whether the value and pricing of risk isn't, at this moment in time, just as arbitrary as children experimenting with different soap brands and strings and maybe some fans and great big belts with suspenders.... all to make some bubbles. Less metaphorically, and more financially speaking, I think that we've come to think of bubbles as being baseless overvaluation; values that fluctuate drastically from some thing's "inherent" value.
PRICING of anything is by nature a proportional measure. A price of one thing can only truly be understood in terms of its value relative to other things. A dollar bill, for example, is nothing but a teaspoon whose volume capacity changes on the minute. If we don't measure every thing simultaneously, we are bound to get little bubbles of value. This, as I understand it, is a way to make money.
The PRICING OF RISK is a little bit different. I understand nothing about how risk is valued. I am privy only to small pieces of the market. By way of example, here is what I have observed: Underwriters will assign higher risk to a portfolio of mortgage loans made to sub-prime (low credit-scoring) borrowers. This type of lending is riskier than prime lending. So banks bundle these loans together into a security that is sold to investors, paying attorneys to draft disclosures that over-encompass the universe of potential risks and "pass the risk buck" on to the investors. Insurance is purchased on these securities to cover the investors in case the chance of risk materializes into default (I'm sure there are well written nuances to spell out what types of risk the insurance does and does not 'insure' against). Then these securities are sold again. And again. New Representations and Warranties are drafted at each sale juncture and new insurance is purchased. The real risks are (1) not understood; and (2) everyone feels immune from whatever the risk may be.
The Atomic Hot Potato
I imagine a game of hot potato played with, lets call it: a risk bubble. Such a strange translucent balloon made of a film full of air. Oh, and since we're talking about risks, lets say that our air is laced with airborne contagions. And with each pass of this risk bubble, more germ-laden air is added, more money goes in and then the now bigger bubble is sold and passed along to the next person. Silly analogy, I know. But everyone is betting on this thing not bursting in his own hands.
My Fear is that these bubbles have been made and are still (post-"crisis") out there. When they burst, they will infect us all. This myth that risk can be "passed along" does not serve any of us.
Risk exists and it can be mitigated:
(1) Management of Risk: good managers can guide operations in ways to minimize risks, good lenders can make available fair loans that people can actually afford; statutes and regulations can strengthen fiduciary responsibilities and hold company officers accountable for the avoidance of unnecessary risks.
(2) Ownership of Risk: each of the buyers along the route can tie into a fair and proportional share of said risk. Distribute risk proportionately rather than bundle it into an un-owned and dangerous mass.
Clearly there is a lot that I don't yet understand about all of this business. For example, I'd like to look more closely at the fine print in AIG insurance policies. I'd like to look at underwriter's pricing formulas. There is a lot to be learned. Still, I suspect that fancy formulas and language might not get around the fact that we are fundamentally wrong about the way we look at risk.
One final thought: Environmentalists talk about True Cost Economics, which , as I understand it is setting prices that account for all the costs associated with a product: the cost of it's disposal and any other associated pollutant clean-up.
Currently, risk seems to be priced based on some myth of what it costs to avoid it. Maybe we need to accept that it can't be avoided and include all the potential downstream costs into our calculation of sharing risk. And then, take it for what it is: a risk of investing. Flip a coin and our risk may pay off, if it doesn't we simply each must swallow our own proportional share of said risk.
Disclosure: these thoughts and opinions are based on incomplete knowledge and may even contain some flat out mis-information. I am just blowing hot air bubbles here.
By RISK, I am not talking about the game of global domination, I am talking about the industry for pricing (ie. Moodies, S&P, bank underwriters), managing (real best practices in the work place), mitigating (carefully crafted disclosure statements written by attorneys), selling (by companies who engage in known risks), and buying (in some form or another, all of us) of exposure to the chance of financial loss.
By BUBBLE we can imagine a child's game of blowing bubbles; sometimes we get big bubbles, sometimes we get little bubbles, whatever. What I wonder is whether the value and pricing of risk isn't, at this moment in time, just as arbitrary as children experimenting with different soap brands and strings and maybe some fans and great big belts with suspenders.... all to make some bubbles. Less metaphorically, and more financially speaking, I think that we've come to think of bubbles as being baseless overvaluation; values that fluctuate drastically from some thing's "inherent" value.
PRICING of anything is by nature a proportional measure. A price of one thing can only truly be understood in terms of its value relative to other things. A dollar bill, for example, is nothing but a teaspoon whose volume capacity changes on the minute. If we don't measure every thing simultaneously, we are bound to get little bubbles of value. This, as I understand it, is a way to make money.
The PRICING OF RISK is a little bit different. I understand nothing about how risk is valued. I am privy only to small pieces of the market. By way of example, here is what I have observed: Underwriters will assign higher risk to a portfolio of mortgage loans made to sub-prime (low credit-scoring) borrowers. This type of lending is riskier than prime lending. So banks bundle these loans together into a security that is sold to investors, paying attorneys to draft disclosures that over-encompass the universe of potential risks and "pass the risk buck" on to the investors. Insurance is purchased on these securities to cover the investors in case the chance of risk materializes into default (I'm sure there are well written nuances to spell out what types of risk the insurance does and does not 'insure' against). Then these securities are sold again. And again. New Representations and Warranties are drafted at each sale juncture and new insurance is purchased. The real risks are (1) not understood; and (2) everyone feels immune from whatever the risk may be.
The Atomic Hot Potato
I imagine a game of hot potato played with, lets call it: a risk bubble. Such a strange translucent balloon made of a film full of air. Oh, and since we're talking about risks, lets say that our air is laced with airborne contagions. And with each pass of this risk bubble, more germ-laden air is added, more money goes in and then the now bigger bubble is sold and passed along to the next person. Silly analogy, I know. But everyone is betting on this thing not bursting in his own hands.
My Fear is that these bubbles have been made and are still (post-"crisis") out there. When they burst, they will infect us all. This myth that risk can be "passed along" does not serve any of us.
Risk exists and it can be mitigated:
(1) Management of Risk: good managers can guide operations in ways to minimize risks, good lenders can make available fair loans that people can actually afford; statutes and regulations can strengthen fiduciary responsibilities and hold company officers accountable for the avoidance of unnecessary risks.
(2) Ownership of Risk: each of the buyers along the route can tie into a fair and proportional share of said risk. Distribute risk proportionately rather than bundle it into an un-owned and dangerous mass.
Clearly there is a lot that I don't yet understand about all of this business. For example, I'd like to look more closely at the fine print in AIG insurance policies. I'd like to look at underwriter's pricing formulas. There is a lot to be learned. Still, I suspect that fancy formulas and language might not get around the fact that we are fundamentally wrong about the way we look at risk.
One final thought: Environmentalists talk about True Cost Economics, which , as I understand it is setting prices that account for all the costs associated with a product: the cost of it's disposal and any other associated pollutant clean-up.
Currently, risk seems to be priced based on some myth of what it costs to avoid it. Maybe we need to accept that it can't be avoided and include all the potential downstream costs into our calculation of sharing risk. And then, take it for what it is: a risk of investing. Flip a coin and our risk may pay off, if it doesn't we simply each must swallow our own proportional share of said risk.
Disclosure: these thoughts and opinions are based on incomplete knowledge and may even contain some flat out mis-information. I am just blowing hot air bubbles here.
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