the BalanceZone Blog

Virtual Financial Markets---

The BalanceZone Team — Mon, 21 May 2012 16:42:04 GMT

A barrel of oil is traded approximately 45 times in the virtual financial markets (Derivatives) before it is actually used by humans.

Think about that.

Probably a good explanation for the volatility in energy prices?

Think so?

Ya.

Can you say, "Over traded"?

Beer--

The BalanceZone Team — Tue, 01 May 2012 15:14:08 GMT

Beer Will change the world?

I don't know how but it will. There are lots of crazy things going on with our economy.

Is it good? Is it bad?

You have two choices.

1) Old School economics: You look at GDP, sales growth, new home sales and starts, The Beige book, employment, etc. But you do not look at the banking system (The amount of money, credit and debt in the economy.

2) New School economics: You take Old School Economics and add the banking system.

If we take the Old School perspective we are fine. We are more than fine. We are doing pretty darn well.

If we take the New School perspective we are not fine. We are at our global debt capacity.

No matter what your perspective, the one thing that the BZI Team can tell you with almost 100% certainty is that people will still consume, beer.

Beer.

Beer is the third most consumed beverage on the planet. Only water and tea beat beer.

Our suggestion is to drink a few beers. Not too many! Just a few. And then decide if you are and Old School Economics person or a New School economics person.

Ok, maybe this isn't great investment insight. But, you should feel better if you toss back a few BEERS.

Cheers!

Duck--Rabbit Economics

The BalanceZone Team — Tue, 07 Feb 2012 19:56:57 GMT

What do you see? Duck or rabbit? Most people see the duck first, and then the rabbit. The point we want to make is that it is both.

Same can be said for statistics about our economy.

We point this out because of the all time high in conflicting economic data.

Perspective.

This drawing reminds us of one of our favorite quotes, "The car goes where the eyes look".

Duck or rabbit, good news or bad news, focus on what makes you happy.

Investing With Credit Cards--

The BalanceZone Team — Mon, 06 Feb 2012 16:23:01 GMT

The way our government is spending money is analogous to an individual borrowing on their credit cards to invest in the stock market.

Nothing good can come from this.

Currency Wars Or One Currency For All?

The BalanceZone Team — Mon, 06 Feb 2012 16:12:40 GMT

Look at this international airline boarding pass. Notice what is underlined in red.

Notice they did not say, "Dollars, Euro's, Peso's etc...

If the IMF has their way, the SDR's will be hear before you know it.

Deflation In Things I Own, Inflation In Things I Need.

The BalanceZone Team — Fri, 03 Feb 2012 16:05:12 GMT

Deflation in the things I own, and inflation in the things that I need.

Crap.

Sadly, the Elephant in the room that Mr. Bernanke keeps talking about has a first name: Deflation, last name Inflation.

This makes for a strange looking elephant.

Debt Vomit--

The BalanceZone Team — Wed, 28 Dec 2011 20:33:09 GMT

There is a scene in the Monty Python movie, (The Meaning of Life) in which a hugely fat, grotesque man eats an enormous amount of food. He repeatedly vomits, and then explodes after he eats one last tiny dinner mint.

It seems as though the economic dinner mint is just around the corner. We are not sure what this little triggering event will be, but Lord knows we have a plethora of dinner mint situations that could cause a massive financial avalanche of debt vomit.

The entire financial system has gorged itself in, "Debt vomit" for the last 40 years. (Getting off the gold standard, abusing the Black Scholes Option Pricing model, excessive dependency on spreadsheets, and becoming enamored with really powerful computers has created a series of predictable accidents that got us into this horrific economic mess.)

To put this in perspective, there is 715 trillion dollars of notational derivatives and debt sitting on top of our planet that is only worth 60 trillion.

We have 10 times more notational risk and debt than we do wealth for the entire planet.

This is like making $10,000 a year and trying to support $100,000 of credit card debt.

We have a problem. We simply cannot pay the interest on the debt.

No economy can grow with all of this debt hanging over it.

The only viable options is: Debt forgiveness on a governmental, corporate, and personal basis.

Failure has to be allowed to rip through the system.

Bankruptcy is not an evil word.

Look at it this way:

In order to have Christianity you must have a hell, and in order to have capitalism you must have failure.

Incentives, and punishment need to get back to equilibrium.

Once we get the incentives and punishments back to equilibrium we'll be fine.

People will begin to realize that they aren't really mad at other wealthy people. Hell, in America we love winners. We love wealth. What we can't stand is CHEATING. We hate cheaters.

A lot of very wealthy people and entities will have to lose an enormous amount of money.

This ends badly for those who are not prepared.

But, this is not the end of the world.

The U.S. will be OK.

We survived the civil war did we not?

After the failure is allowed to rip through the system, our bet is that a reboot will come faster than you could ever imagine.

Right now, everyone is sitting on pins and needles.

The mirrors have been pulled out by the Tea Party and Occupy Wall Street. And no one likes what they see.

The people are finally beginning to wake up to this atrocity.

Grotesque!

We will not perish.

But, we really do need to get on a diet.

No more debt vomit.

Debt forgiveness is our only corner of freedom.

Earthquakes--

The BalanceZone Team — Sun, 06 Nov 2011 15:09:05 GMT

Earthquakes are interesting.

They show up with no warning.

With all of the knowledge and data that we have about our beloved earth, we have no idea how to predict when an earthquake will hit.

At best we can only know the reasons why they occur.

The same is true for financial earthquakes.

We have a Godzilla amount of data about our financial markets.

We know that they sometimes crash.

We have no way to predict when, where, or why.

We only know that they happen.

The 5.6 magnitude earthquake that rocked Oklahoma last night is a good reminder to everyone.

Average markets, average weather conditions, and average earth movements don't cause ruin.

It is the statistically improbable event that creates ruin for people.

We live in interesting times.

Blankets For The Indians & 401k's For The Retail Investor

The BalanceZone Team — Tue, 01 Nov 2011 12:53:23 GMT

Blankets For The Indians & 401k's For The Retail Investors.

Both are silent killers.

These days, the white man is paying for his sins.

Casino on every corner.

But we've been wondering when is the 401k/mutual fund industry going to pay for their sins.

When is the average retail investor going to get his/her payback for the failed experiment called:

401k.

Let's face it. The average retail investor has paid the average 401k plan 1.5 or 2% for the last 5, 10, 15, and in some cases 20 years for the luxury of earning 0% (basically nothing).

Sure, there are a few funds with 5 starts that, "Outperformed".

Go Morningstar!

But how can performance this bad get paid so well for so long?

Sadly, the fees really aren't the real problem.

The real problem is how 401k's are designed.

There is no exit strategy.

None.

You will never hear your 401k vendor say: Get out.

Even worse, the mutual funds that sit inside of your 401k are all based on some type of MVO (Mean Variance Optimization) algorithm. Everything is based on the Bell Curve.

Consequently, all 401k's are based on, "Average Design, for Average Acting Markets".

The problem is that markets aren't average anymore.

The combination of Wall Street's high frequency algorithmic trading super computers and extreme leverage techniques have made 4, 5 and 6 standard deviation movements the norm.

And if not the actual norm, these movements are starting to show up more frequently than ever before.

Average markets do not cause financial ruin. It is the statistically improbable event that causes financial ruin. Yes, eventually markets do revert back to the mean. However, it is the freakish event that kills 401k investors.

These MVO algorithms (and the people who pay homage to them) treat these freakish events as if they were financial fairies.

When you need these models to protect you the most, they fail.

When markets heat up and get crazy, everything correlates to 1. Everything moves in the same direction simultaneously.

The God's of the 401k universe will sheepishly acknowledge this, but then do nothing about it. They point out that their strategy works most of the time. And to be fair, this is a true statement.

So let's be honest:

401k's are expensive, have no exit strategy and are poorly designed.

401k investors have been given financial blankets dipped in financial MVO bell curve disease.

As always, we remain optimistically paranoid, with a twist of, "Really pissed off".

In conclusion, we see it like this: If the auto industry can survive from the Pinto, Gremlin and Pacer debacle, then surely our government and our beloved financial services industry can come up with a better way to save for retirement.

Why Occupy Wall Street Is Really Mad--

The BalanceZone Team — Sun, 30 Oct 2011 14:29:59 GMT

We know what Occupy Wall Street is really mad about.

Cheating.

We know what the Tea Party is really mad about.

Cheating.

Neither group is really mad about a few people winning (getting rich).

They are mad about cheating.

Wall Street cheated and got away with it.

It's similar to the Lance Armstrong story.

There is no legal proof that Lance Armstrong ever took performance enhancing drugs.

There are however, several eye witnesses who will tell you that they saw him take dope.

For the average European cycling fan, this is why they hate Lance Armstrong.

From their perspective, Lance won because Lance cheated.

The Wall Street Bankers were ingenious in how they got around the system.

When a Wall Street banker or bond trader made a bad bet, they didn't get foreclosed on like the home owner who took out a loan that he/she could never repay.

There was no punishment for the banker. Actually, the bankers got the exact opposite of a punishment: Rewards!

The banker got free money from the tax payer to take care of his stupid bets.

There was a punishment for the home owner: FORECLOSURE.

There was an incentive given to the banker. He/she could be wrong, and cheat and they would get a governmental bailout.

It's not fair!

They cheated. They got away with it. They keep getting away with it. And when they get caught cheating, our rule makers do nothing about it.

OWS, and the Tea Party are mad for the same reason. They just haven't figured this out yet.

OWS is more focused on the banks.

The Tea Party is more focused on the politicians.

In the not too distant future, we think that the these two seemingly different groups will merge into one group that is committed to one thing:

Stop the cheating.

53 To 1--

The BalanceZone Team — Wed, 26 Oct 2011 14:41:36 GMT

Did you hear about the bank that is leveraged 53 to 1?

The U.S. Federal Reserve.

Yep! 52 billion in capital controlling 2.8 trillion in assets.

Now that's some leverage.

Now depending on who you want to listen to, our current TBTF banks mixed in with our regular sized U.S. banks have about 13 to 1 leverage.

This means: A 8% drop or greater would annihilate ALL equity.

Hop the pond, and we see that our European friends are kicking a 26 to 1 leverage ratio for their banks. And, if we apply simple math...

This means: A 4% drop or greater would annihilate ALL equity.

(FYI... Lehman was just 1 bank leveraged at 30 to 1)

Perspective?

Specifically, Japan’s banks are leveraged at 23 to 1. France’s are 26 to 1. Germany is 32 to 1

So, you kind of get the idea? Ya?

Ironic. The drunkest on debt of all banks, is the one entity that is suppose to bailout all the other drunk on debt banks.

Yes, stocks are rallying now based on the belief that QE III is coming.

The probability of a financial avalanche is high.

When?

We don't know.

Even at 53 to 1, the FED, and the other money printing central banks can keep on printing more money for a very long time.

Interesting.

As a side note, stock markets of countries that are on the verge of blowing up their respective currencies typically have incredible rates of return leading right up to the collapse of their money.

Click here for our old post about the mother of all currency killers, "Zimbabwe".

Sadly, stocks always get it last.

It's Bad...

The BalanceZone Team — Mon, 17 Oct 2011 15:49:19 GMT

It's bad.

Our financial markets are broken.

According to the Bank of International Settlements, there is over 600 trillion dollars (notational value) of derivative securities floating around our planet.

Global GDP is approximately 60 trillion.

10 to 1.

That's a lot of leverage.

Greece, and Italy have huge debts coming due beginning in March of 2012.

Here in the U.S., trillions of 5 year adjustable loans and bonds are coming up for resets in March 2012.

The perfect financial storm is brewing.

The ingredients are in the stew.

It's bad.

It's not financial Armageddon.

It is what has to happen.

Failure.

Failure has to be allowed to clean the financial markets.

A lot of very rich people, and entities will have to lose a lot of money.

The good news is that up until March 2012, we see U.S. stocks moving much higher.

Strangely, our normal economy is fine. This earnings season should bring lots of pleasant surprises. Balance sheets are clean, Income statements are healthy, debts are being paid down, and companies have lots of cash to work with.

If we look at traditional economic indicators, we can make a case for the DOW Jones Industrial to go to 18,000, and even higher in the next few years.

However, when you look at the 10-1 debt to value ratio that is sitting on top of our planet like a black cloud, (if we can't pay the interest on this debt) we see the Dow Jones Industrial at 2000.

Now that's a GAP!

We feel that the Federal Reserve implemented, "Operation Twist" so that the U.S. Government, and corporations could get one last shot of really cheap long-term financing.

But that's it.

Once everyone refinances their 5 year arms for 30 year loans at 2 and 3%, the central banks of the world will only have one option.

Print more money.

This will cause huge global inflation.

As evidence from the, "Occupy Wall Street Movement" normal people are upset.

They don't want any more money printing.

They are upset about, "Global Banking Occupation".

This group of angry citizens hasn't figured out this one point yet. (This goes of the Tea party too).

Once they do, and they get focused on one single message, watch out.

We see our domestic problems with all of the 5 year ARM resets colliding with the European debt crisis. Once the fighting across the ocean begins, all financial markets will simultaneously experience extreme volatility and extreme devaluation.

Correlations will all go to: 1.

It's Bad.

But, it doesn't mean that you cannot make money.

Have a strategy in place.

Start selling your risk-based investments. You should have from now until early next year to get some decent prices.

In early 2012, look for opportunities to buy PUTS.

You don't want to be buying puts when there's blood on the streets. You want to be buying them when the sky is calm and blue.

Buy some physical Gold and Silver. Not ETF's.

When the volatility comes, be ready to buy companies with simple business models that trade at 10 times or less price to free cash flow.

It's bad.

However, on a closing note, we have one kind-of positive thing to point out.

While we might not have the AAA rated bonds any more, our BOMBS are still AAA.

We have the world's greatest military.

In the final analysis, our BOMBS are our currency.

If there is any glimmer of hope, we would urge you to look at New Orleans and how it has come back since Katrina.

To see New Orleans before, Katrina, then right after Katrina, and now, today, well, it's pretty darn amazing.

New Orleans is back. They survived.

There is still a lot of work to do. Sure.

But they came back.

Our financial system will come back to.

We will re-establish the, "Glass-Steagall Act".

We will design a new rules based currency and banking system.

We will keep commercial banks and investment banks separate.

There will probably be two tiers of stock markets. One for individuals, pension funds, 401k's and small business. There will be another tier that will allow for financial engineering to keep on.

Expect tough.

Expect rough.

Respond with ability.

You cannot control the markets. You can control how you respond.

This will be your corner of freedom.

It's bad.

The Defaults Are Coming!?!

The BalanceZone Team — Wed, 12 Oct 2011 14:27:02 GMT

Harrisburg, Pennsylvania declared bankruptcy today.

Sadly, it looks as though Meredith Whitney was right.

To all municipal bond investors: Be Careful.

Municipal bonds could very well be the, "Turkey on the Wednesday before Thanksgiving Investment".

Historically, there has been very little evidence to suggest that they are risky. Especially the well rated and General obligation bonds.

It begs the question, "Have the rating agencies given AAA ratings again to situations that are really ZZZ?" Time will tell.

If it happened to Harrisburg, the capital of Pennsylvania, it could happen to any city.

Paul Revere once famously said, "The British are Coming"

The city of Harrisburg may be signaling, "The Defaults Are Coming".

We remain, optimistically paranoid.

A Village Cannot Kill Risk-- Only Hide It.

The BalanceZone Team — Sun, 09 Oct 2011 23:42:52 GMT

Risk cannot be lost.

Shuffle it around. Sure. That's really all that you can do.

Some people are better equipped to deal with it than others. But that is about it.

It never really goes away.

Back in the early 70's,when the Black-Scholes Option Pricing Model was created the race to slice and dice risk was on. The illusion that this model created was that uncertainty could be removed from the markets.

With uncertainty eliminated, more debt could be taken on, more derivative securities could be created, more profits could be made.

Why do we bring this up?

Because.

Lately, everyone wants to blame someone for our current economic mess.

How did we get in this predicament?

The answer: By a series of accidents.

Really smart people were handed really good computers loaded with spreadsheets.

While the math behind Black-Scholes isn't earth shattering, it wasn't easy to replicate and duplicate before the spreadsheet. It took a lot of time. It took a good mathematician.

Fast, inexpensive computers, tethered to spreadsheets, created a fertile ground for financial engineers of varied degrees of morality to quickly and easily spread the gospel of, "Slice and Dice Risk".

Wall Street, and governments became addicted to this new financial crack.

And, so did the average consumer.

To blame any one entity, (Presidents, democrats, republicans, etc...) is myopic.

It took a village.

It will take a village effort to fix it.

Frankenstein finance....

The BalanceZone Team — Tue, 04 Oct 2011 10:11:47 GMT

A spectre is haunting Europe: the spectre of capitalism. A vast and highly unstable mixture of debt — trillions of dollars of sovereign, corporate and private borrowing accumulated over decades — is strapped to the advanced Western economies like a suicide bomber’s gelignite vest.

The task facing our politicians is somehow to defuse this bomb without inadvertently triggering the sequence of defaults and bankruptcies that would set it off. No wonder they walk around the problem scratching their heads, prodding it gingerly here and there. The horrible truth is dawning that the problem may well not be technically solvable.

For the first time in my life — I am 54 — I get the sense of what it must have been like to have lived in my grandparents’ or great-grandparents’ generation: in 1913, say, or 1937. One feels a great smash coming ever closer, almost in slow-motion, and yet there seems to be nothing that can be done to avoid it.

73 per cent of shares on the New York Stock Exchange are traded by computer

How have we got ourselves into this mess? After all, we were supposed to be living in an era of unprecedented peace and prosperity.

Communism had collapsed and the threat of nuclear annihilation had receded. Immense advances in computer technology were creating whole new economies. Vast markets were opening up in the developing world. Above all, we were supposed to have learned enough about economics to have created the necessary institutions — the World Bank, the International Monetary Fund, the G20, the OECD — to ensure we never repeated the mistakes of the Thirties.

Where did it all go wrong?

Bizarrely enough, as good a place as any to start looking, in my opinion, is a hole in the ground near the small town of Waxahachie, Texas — or, to be more precise, 17 holes in the ground, each of them an air shaft leading down to 14 miles of abandoned tunnel dug into the hard Texan rock, which are all that remains of a grandiose scientific project called the Desertron.

The Desertron — or the superconducting super-collider, to give it its proper scientific title — was supposed to be America’s answer to CERN’s Large Hadron Collider in Geneva, a gigantic experiment to investigate the most fundamental laws of our universe. With a circumference of 54 miles, it would have been three times as large and powerful.

Unfortunately it would also have been nearly three times as expensive. In October 1993, in order to save projected future costs of $10 billion, the U.S. Congress voted to abandon the whole scheme — writing-off the work already done at a cost of $2 billion.

For a whole generation of American academic physicists, that decision wiped out their planned careers.

One physicist with a PhD I spoke to when I was researching my new novel, now in his 40s, told me he cried when he heard the news. What was he supposed to do now? He had to earn a living somewhere. His solution, like that of a majority of his colleagues, was to go and work on Wall Street — in his case, in the giant investment bank Merrill Lynch.

The resulting collision of brilliant but unworldly scientists trained to manipulate sub-atomic particles and aggressive financial traders eager to devise new products was to be more spectacularly dangerous than anything that might have been produced beneath the dusty surface of Waxahachie.

For this was the deadly partnership that helped give us a whole alphabet soup of fearsomely complicated financial derivatives — loans and mortgages and investments packaged up into bundles and sold around the world — that almost no one, and certainly not the regulatory authorities, ever really understood.

Only a matter of time: Billionaire investor Warren Buffet has criticised what he calls 'financial weapons of mass destruction'

When these toxic ‘financial weapons of mass destruction,’ as the U.S. billionaire Warren Buffett presciently called them, duly blew up in 2008, the same U.S. Congress that had saved $10 billion shutting down the Desertron had to come up with a rescue package for the banking system that has since been estimated as costing the American taxpayer $3.7 trillion.

If ever there was an example of the Law of Unintended Consequences in action, this must surely be it. But that may be only the start.

Before I began my research, I subscribed to the widely-held view that people in the financial sector generally had qualifications in economics or business, wore striped shirts and braces (if they were male), and sat in trading rooms shouting wildly into four phones simultaneously.

To my surprise, I found that this image is entirely outdated.

'Quant': Traders these days are more likely to have qualifications in maths or physics than economics

One extremely successful hedge fund manager I spoke to — with $12 billion in assets under management — won’t hire anyone without a top PhD in maths or physics; even economics is considered too ‘soft’ a degree. Increasingly, the people in the dealing rooms these days — young, casually-dressed — look as though they should be in lecture halls. They are known in the business as ‘quants’ — short for ‘quantitative analysts’.

Quants analyse the market with intense mathematical and statistical precision to predict share price movements and the level of investment risk; they sit at screens and rarely talk in anything louder than a whisper.

The trading is mostly done by computer, for which the quants write the programmes. Now, 73 per cent of shares in New York are traded by computer, either by so-called ‘high-frequency strategies’, which may hold the shares for only a few milliseconds, or by algorithms devised by quants. Algorithms are sophisticated programmes designed to predict the behaviour of the markets.

There is something slightly creepy about it. In the words of Emanuel Derman, himself a leading quant: ‘When physicists pursue the laws of the universe, it seems selfless. But watching quants pursue sacred laws for the profane production of profit, I sometimes find myself thinking disturbingly of worshippers at a black mass.’

Increasingly, the role of the trader is like that of a pilot in a fly-by-wire jumbo jet. The job is done by computers: he — for some reason quants are mostly men — sits at a screen and monitors the operation, only intervening when something goes wrong.

Recently I watched an algorithmic system in Geneva belonging to a hedge fund trading on the New York Stock Exchange. The computer had picked the stocks it wanted to trade. It communicated with the broker’s computerised system in the U.S. which, in turn, communicated with the computerised exchange that facilitated the deal. At no point was a human involved.

In the 20 minutes I was watching, the machine made a profit of $1.5 million. This hedge fund has made a return for its investors of more than 80 per cent in the past three years, at a time when most of us have seen the value of our pensions and tracker-funds go down in a falling market.

‘Our computers love it when the markets panic, because when people panic they behave in very predictable ways,’ I was told. In other words, the machines thrive on fear.

Volatility: Computerised trading thrives on fear

There is even a way of estimating this human weakness: the Standard & Poor 500 Volatility Index (VIX) measures the expected volatility on the Chicago Stock Exchange over the coming month, based on a hugely complicated mathematical formula devised by quants. It is popularly known as ‘The Fear Index’.

In 1965, the founder of the computer firm Intel, Gordon Moore, propounded what is known as Moore’s Law: that computers would double in power and halve in cost every 18 months. His forecast has proved amazingly accurate.

To take one example: as recently as the Nineties, CERN’s experimental data was all analysed by a Cray X-MP/48 supercomputer which cost the scientists $15 million. Yet that machine had less than half the computing power of a modern Microsoft Xbox, which costs $200.

When something continues to double in size — in this case computer power — it is called exponential growth. But as Moore himself observed a few years ago, exponential growth can’t continue for ever. It can be pushed to its limit, he said, ‘but eventually disaster happens’.

We have been warned.

Computers have become so powerful in the world of financial trading that the human involvement has been reduced to that of the quants and their obsessive statistical analyses. But computer programmes based on statistics, however brilliantly analysed, do not allow for common sense.

Computers predicted the U.S. property market would rise for ever because statistics showed the country’s house prices had never fallen in history — and every financial institution worldwide piled into the American’s mortgage market. We all know what happened next: the housing market crashed, U.S. mortgages were worthless and the so-called sub-prime loan crisis sent the world’s financial markets into meltdown.

Most of us in Britain remember May 6 last year as the date of the General Election. But about two and a half hours before the polls closed in the UK, at around 2:30 pm on the American East Coast, the U.S. financial markets experienced what came to be known as ‘the Flash Crash’.

The events of those few minutes provide a terrifying snapshot of what the modern markets have become. First, there is their sheer scale: 19.4 billion shares were traded on that day, more than were traded in the entirety of the Sixties.

But the figure is misleading: hundreds of millions of these shares were never actually sold, but merely held for a few thousandths of a second as computerised high-frequency traders tested the waters in the market.

They ‘sniped’ and ‘sniffed’ (in the jargon of the industry), making bogus offers to buy or sell shares so that they could find out the price, but the traders never went through with the sale.

The trouble is that the computers registered these bogus offers as real sales, and so much of this activity took place that the online trading section of the New York Stock Exchange temporarily froze. It was unable to cope — all the ‘sniping’ and ‘sniffing’ had made the amount of shares traded seem ten times larger than it actually was.

Drop: Huge lurches in the markets are now common

In the ensuing panic, the Dow Jones Industrial index dropped by roughly 700 points in the space of 20 minutes, wiping out nearly $1 trillion of investors’ money. This, then, is the financial world which we now live in: a world of extreme volatility, with lurches of 3 or 4 per cent a day on the markets no longer uncommon.

A world of terrifyingly complicated financial instruments designed to spread risk but which have, instead, spread a contagious lack of confidence; a world of instant communications, in which tremors of panic spread across the whole globe in the time it takes ripples to spread across a lake; a world in which thousands of the most brilliant minds on the planet are no longer paid to pursue scientific progress, but to devise financial strategies that are mostly non-productive and sometimes potentially highly dangerous.

The novelist and physicist C. P. Snow delivered a famous lecture in 1959 about what he called ‘the two cultures’, the humanities and the sciences, and the failure of the one to understand the other.

‘A good many times,’ he said, ‘I have been present at gatherings of people who, by the standards of the traditional culture, are thought highly educated and who have with considerable gusto been expressing their incredulity at the illiteracy of scientists.

‘Once or twice I have asked the company how many of them could describe the Second Law of Thermodynamics. The response was cold: it was also negative. Yet I was asking something which is the scientific equivalent of: “Have you read a work of Shakespeare’s?” ’

It seems to me we now have to add a third culture to Snow’s list: the financial markets.

How many of us, for example, have the least idea of what the latest financial instrument — an exchange-traded fund — actually is? Yet the quants are now busy turning exchange-traded funds into a trillion-dollar industry, up 40 per cent in Europe alone in the past year. And like all these computer-devised financial derivatives that preceded them, they are cloaked in mystery and are risk damaging the financial system.

How many of us even know what short-selling is? I certainly didn’t, before I started researching my book.

As the current sense of sleepwalking towards calamity continues, my worry therefore is not so much the obviously imminent Greek default, or even the strains in the Eurozone, or the U.S. budget deficit, or the long-term intentions of the Chinese.

It is that the financial system itself has somehow slipped all human control — that it has become the preserve of a profoundly anti-democratic, super-rich elite, and that it girdles the planet like some alien entity from an H. G. Wells novel.

The digitised financial machine does not work for us: we work for the machine. And I do not believe that our political leaders have the faintest idea how to bring it under control.

The BZI Team wishes this were not true. Sadly, this article from the Daily Mail is hauntingly accurate.

Click here to see the full article.

Big Baby Stock Market Didn't Get QE III

The BalanceZone Team — Mon, 26 Sep 2011 14:57:54 GMT

Big Baby stock market didn't get QE III.

Consequently, it threw a small temper tantrum: 2000 Dow points.

This is what you expect from a spoiled, immature brat.

The market was looking for any reason to flame and blame. Europe!

The sudden focus on Europe was all that they needed to tell Big Ben that they were serious.

Instead, Ben, delivered tough love:

Operation twist.

Ben is selling short-term treasuries, and using the proceeds to buy long dated maturities. This move should send long interest rates down thereby stimulating our sagging housing market.

Tough love.

On one side this is good. He's stopped the Zimbabwe style printing press. The Fed's balance sheet, for the time being is not going to expand.

Our guess is that Europe will figure their banking and sovereign debt crisis out. It won't be pretty. It won't be TARPish. It will be the antithesis of TARP.

There is no, "United" in Euro.

Our hunch is that now that the overly leveraged hedge funds of the world have thrown their fit, the market will level off. Focus will be shifted from Europe to the U.S. economy and corporate earnings.

Our economy appears to be in fine shape. Not great. But fine. Once this refocusing happens, and earnings come rolling in, we think stocks will move much higher.

For those who used BZI, you should have ample cash to take advantage of an early Christmas present from Santa.

Buy the dip.

Keep your scale balanced.

Buy the dip.

It's gold versus governments time!... Sadly

The BalanceZone Team — Mon, 12 Sep 2011 11:27:54 GMT

It's gold versus governments time!

We wonder who is going to win this one.

We really don't have financial markets any more. We have theater.

If I Was President For A Day, I Would Do 12 Things

The BalanceZone Team — Wed, 07 Sep 2011 11:29:20 GMT

Twelve Specific Recommendations

Banks and bondholders should take a hit. Banks are not going to lend anyway so bailing them out at the expense of taxpayers is both morally and economically stupid. End the bailouts, all of them, and prosecute fraud, the higher up the better.
Implement serious bank reform now, not 9 years from now. Banks should be banks, not hedge funds. This proposal will necessitate breaking up banks. So be it.
Scrap Davis-Bacon and all prevailing wage laws. Such laws drive up costs and have wreaked havoc on many cities and municipalities, now bankrupt or on the verge of bankruptcy.
Pass national right-to-work laws. Once again, we need to reduce costs on businesses and local governments to spur more hiring and reduce costs.
End collective bargaining rights of all public unions. The goal of unions is to provide the least service for the most money. The goal of government should be to provide the most services for the least money.
Scrap ethanol policy and end all tariffs.
Legalize hemp and tax it. Prison costs will go down, tax revenue will grow, and biofuel and fiber research will expand as hemp produces very soft fibers.
Corporate income tax rates should be lower in the US than abroad. Current policy encourages capital flight and jobs flight via lower tax rates on profits overseas than in the united states. This penalizes businesses that work only in the US, especially small businesses that do not have an army of lawyers and lobbyists.
Stop the wars and set a plan to bring home all US troops from Iraq, Iran, and 140 or so other countries.The US can no longer afford to be the world's policeman.
Implement Paul Ryan's Medicare voucher proposal. It is the only way so far that anyone has proposed that puts much needed consumer "skin-in-the-game" that will reduce medical costs.
Legalize drug imports from Canada
End the Fed and fractional reserve lending. Both have led to boom-bust cycles of ever-increasing amplitude.

Those are the kinds of things we need to do, not throw more money at problems. The latter does nothing but drive up national debt and interest on the nation debt for short-term gratification.

Notice how counterproductive Fed policy is and how counterproductive Obama's policies are.

The Fed wants positive inflation but businesses have not been able to pass the costs on. Instead, companies outsource to China. Those on fixed income get hammered.

Fool's Mission

Obama wants to create jobs via stimulus measures. It's a fool's mission.

Prevailing wages drive up the costs, few are hired, and the cost-per-job (created or saved) is staggering. Money never goes very far because the US overpays every step of the way.

Stimulus plans that do not fix the structural problems are as productive as pissing in the wind. Then when the stimulus dies, which it is guaranteed to do, a mountain of debt remains.

Amazingly Honest 1969 Film About the U.S. Treasury

The BalanceZone Team — Tue, 06 Sep 2011 15:55:23 GMT

the meaning of life in under 300 words

The BalanceZone Team — Mon, 29 Aug 2011 19:19:53 GMT

The meaning of life is pretty straightforward to state. Your life has whatever meaning you give to it. So the question becomes: what do people say gives their lives meaning? That's easy enough to measure and psychologists have done exactly that.

Baumeister and Vohs (2002) have synthesised four factors. When people are asked, the more they report each of these four factors being fulfilled, the more meaningful their lives feel:

Purpose - this could be living happily ever after, going to heaven or even (whisper it) found at work. Whatever it is, meaning in life comes from reaching goals and feeling fulfilled. Even though fulfilment is hard to achieve because the state fades, people need purpose.
Values - people need a moral structure to work out what is right and what is wrong. There are plenty to choose from: some come from religion, others from philosophy and still others from your friends and family.
Efficacy - people want to make a difference and have some control over their environment. Without that, the meaning of life is reduced.
Self-worth - we all want to feel we're good and worthwhile people. We can do this individually or by hitching ourselves to a worthy cause. Either way we need to be able to view ourselves in a positive light.

So, there you have it: the meaning of life in under 300 words.

Two words of warning. Firstly, it can be difficult to get all these things in the same place, although not impossible. We use family, work, hobbies and other things to fulfil our need for meaning. Secondly, a meaningful life is probably necessary to be happy, but it isn't sufficient.