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Politics : Idea Of The Day -- Ignore unavailable to you. Want to Upgrade?

To: IQBAL LATIF who wrote (46099)	5/12/2004 5:49:53 AM
From: IQBAL LATIF	Respond to of 50167

Zack's back They've changed the blogger server and I'm impressed as it's become quite sophisticated. Anyway I've written a post on the market, a long rambling one so it'll fit right in with my previous ones, but not to worry I promise very soon to reflecting on "American strategic focus on the Islamic Crescent" and OBL bashing. It has been a long time since I really wrote anything worthwhile and I can't use work or writer's block (you have to be a writer) as an excuse. Anyway here's the commentary on the markets... What makes the markets interesting is that it's not how smart you are or how much you know but the extent to which you anticipate and play off other people's reaction. Playing the market is merely the modern form of the millenia old game that men have played to wear off their testosterone (as aptly put by a colleague on how it's all a game and just a game). Though oestogerone is better suited for trading since studies have shown that women are better traders than men, because they are rational, passive and analytical whereas men are emotional, aggressive and impatient. Anyway returning to my point of the plain stupidity of the markets. I know I'm right in that the American economy is stronger than ever before and that we've never had it so good. You have growth, growth and growth in the form of jobs, earnings, productivity, corporate health, American economy, global economy etc. Every indicator in this market is bullish (bull means being positive bear is to be negative there's an interesting story behind these labels which I've forgotten) and the only fear we really have is of rising interest rates. Now all of a sudden Essex boys and kids from Queens, who can think of nothing better than a night out in the strip club, have become venerable economists and fret about Greenspan's sword of rising interest rates. Now in Eco 101 it's generally accepted that interest rates are the circulatory blood of the economy (so much for the Muslim belief in a non-interest paying economy, love to see how long that'd last) as it is literally the cost of money. If I want to take out a loan I'll have to pay interest and since in a high leveraged (and efficient) economy like the US credit forms the fundamental stimulus for expansion and investment the interest rate takes on a prime importance. So for the past couple of years Greenspan to steady the economy aggressively slashed rates to 1%, a 40 year low methinks, in order to encourage Americans to take up loans in order to spend, buy homes , start businesses ( which have a 40% failure rate) however these activities, multiplied 250mn times, keep the chugging engines of the economy well oiled (speaking of oil prices per barrel have shot up to 13yr highs which is another story altogether of market overreaction). This is the pretty picture as painted by theory, but reality takes a deep plunge and conceals a sinister turn of events. We have low interest rates because they are disguised subsidies for the financial sector. You or I mere folk won't be able to borrow at 1% from good ole Greenspan, our rates will be around 4% cost of borrowing, but the banks do so from federal funds overnight at 1%. Which means that in effect they can borrow at 1% from the government and lend out at 4% to the common folk, which is a very lucrative business in itself. Hence low rates usually translates in pumping the banking sector with much needed cash flows, after the major screw ups of the 90s, and that's how China & Japan, our Asian giants (and future hegemons of the world according to "civilisationists" even though their populations are collapsing by the minute), keep afloat even though their bankers gave out billions to their keiretsu (weird Japanese term meaning corporate kinship) buddies loans which they never expected to be paid back. So anyway what banks would do is borrow at 1% and invest in risky credit, which yielded more than respectable returns of 5-7% (known as carry trades). If their cost of borrowing increases because of Greenspan their profit will take a corresponding hit and the market's worry that banks will be trigger-shy and unwind these carry trades en masse that is take their money from Turkey and Argentina and deposit them safely back in New York. But anyway again going to the point which I seem to miss the market seems to worry that higher rates will translate to a slowing economy and in general make our rosy dawn of recovery a dismal sequel to the recession we nearly avoided in 2001 (technically we had a recession but that was more of a correction than anything else). But what the market doesn't seem to realise is that it's undervaluing virtually everything b'cuz of an irrational fear of losing it all (what's that Aba song again). In techno speak property prices won't collapse firstly because of the structural reasons propelling but moreso the fact that mortgage rates are already pricing in rate hikes and passing it on to the consumer. Furthermore most Americans have fixed rate mortgages meaning that their rates were set a long time before and don't respond to Greenspan's fiddling. As for everything else it's a pretty poor excuse to think that value in high yield and risky debt depends solely on American rates, and that our boom is just one big arbitrage where we're all bilking the American government. What the market don't realise is that even if banks unwind profit-heavy investments where would they get such a bang for their buck. But even though I'm reasonable sure that I'm right the whole idea is that when am I going to be proven right and that's why I sit at desk and glance ever hopefuly at the indices waiting for the market to regain it's senses. That was the point I was trying to maket and it took me a thousand words and an hour on the trading floor to express it. Zachary Latif 18:58