Déjà Senti: Psychohistory

December 30, 2008

Déjà vu is the expression borrowed from French to evoke an event or a moment that seems familiar.  The literal translation is already seen.  I have often used that expression, and it comes to mind when I read work by another author whose point of view invokes a sense of strong understanding and agreement in me.  Today I read one such piece, and realized that déjà vu is not an appropriate expression.  So in borrowing from déjà vu I have invoked Google Translator and found déjà senti (already sensed) too represent those things we hear, read or learn that we somehow felt as though we already knew them, despite the fact we have never seen or heard them before.

In the most recent newsletter from John Mauldin titled Foundations of Crisis, John kindly publishes a great summary of a book which I have not heard of, but have already ordered on Amazon because the summary was a déjà senti moment for me.  The newsletter is dedicated to a summary of the work of Richard Strauss and John Howe and their book The Fourth Turning. The juxt of it is that there is a cycle of generations that creates some repetition in history, or at least the undercurrent for repetition based on when we are born, what we experience through the stages of our life, and how those events influence us as we age, collectively as generations.  One paragraph that strikes me profoundly was this one:

The real watersheds in history, crises that make or break a civilization, occur roughly every 100 years. The most recent ones in American history that will resonate without looking up the facts in a reference book are the Revolution, circa 1782; the Civil War, circa 1863; and WW II, circa 1943. We’ve had other wars, and they were traumatic enough; that’s the nature of war. But the War of 1812, Mexican, Spanish, World War I, Korean, and Vietnam wars had nothing to do with the country’s survival as an entity, as a civilization. They were optional wars, sport fighting, if you will, by comparison. Wars that occur at a secular Crisis, a “Fourth Turning” to Strauss and Howe, when a Prophet generation is acting as elder statesmen, with Nomads as operational commanders, and Heroes as front line soldiers tend to be total wars that have an ideological underpinning. They’re life-and-death struggles not just for the individual participants, but for the civilization as a whole.

That major wars occur at such long remove from each other probably isn’t an accident. Really catastrophic wars, from at least the days of Troy on down, have usually been the Great Events that resound through living memory. The Great Event of a century forms the thought and character of everyone alive when it happens, influencing them relative to the stage of life they’re in at the time. Perhaps that’s why a people will collectively do its best to avoid a repeat, at least while there’s anyone still alive who saw the last crisis.

The newsletter ends with a strong plug for investing in commodities which on first pass I found distasteful and skeptically placed.  But on some initial reflection the argument at least deserves further understanding which is why I look forward to buying the book.  I also encourage you to read John’s newsletter, and more importantly to subscribe to them going forward.

Foundations of Crisis
John Mauldin’s Outside the Box, December 29 2008


Sock & Awe: The Game

December 30, 2008

Every good new story inspires a host of content, from bloggers, to editorials, to cartoonists.  Luckily in this day and age Flash programmers can jump on the bandwagon.  Click on the image below to go to play Sock & Awe.  This little flash game is a lot of fun!

Sock & Awe
Fubra Limited and Popjam, Accessed December 30, 2008

International Finance: The New Protectionism

December 29, 2008

This is an interesting article from a recent Economist outlining some of the system level thinking, and the implications of protectionist policies in the works by foreign governments to prevent another financial collapse.

It will be interesting to see how Globalisation is transformed in the wake of 2008.  There is a natural undertow of protectionism abound and it surely will bleed itself into the zeitgeist.

THE casualty list from the credit crisis does not stop at investment banks and Iceland. The idea of the international bank is also coming under pressure. The argument that being in lots of countries diversifies risk looks thinner now that the downturn has the world economy in its grip. A brace of regulatory initiatives also suggests that national authorities have become much more focused on their own interests.

The Swiss Federal Banking Commission has released details of its beefed-up capital regime, which will help to restrain growth in assets when times are good. The biggest Swiss banks, UBS and Credit Suisse, will be subject to higher risk-weighted capital requirements and to a new leverage ratio of at least 3%, which caps the amount of total assets that a bank can hold regardless of the risk they entail.

These measures are striking for at least two reasons. The first is that they foreshadow an emerging international orthodoxy. Last month the Basel committee, a group of bank supervisors, unveiled a new strategy that will evaluate the case for leverage ratios. It will also strengthen capital buffers in anticipation of periods of stress.

The second reason is that the leverage ratio will exclude the two banks’ domestic lending activities from the calculation of capital. That makes perfect sense from a Swiss perspective: penalising banks for lending to local customers is the last thing national regulators want. But if domestic loans are widely privileged in this way, the attractions of foreign expansion will dip.[More]

Save yourselves
The Economist, December 11, 2008

The Invisible Fist of Greed and Corruption

December 27, 2008

2008 will go down as the great defeat of neoclassical economics.  While Ph.D.’s, Nobel Laureates, and pundits debate the efficacy of Adam Smith, Ayn Rand, and the Chicago School of Economics as discussed by Barry Ritholtz on Tuesday, the rest of us will still be reeling from the invisible fist of greed and corruption that took down our old form of capitalism, and replaced it with something still unknown.

While the future of economics, lending, and investment and commercial banking are ripe for change, human nature will likely not be so fortunate.  What economists need to account for is that Adam Smith’s Invisible Hand is capable of making a fist.  What philosophers will be forced to debate is whether Enlightened Selfishness as outlined by Ayn Rand is in fact an intelligent guiding principal for regulation.  And what regulators will need to contend with is a good old house-cleaning.

I have no doubt that the events of 2007, 2008 and likely 2009 are going to change institutions to their core.  From Business Schools to the SEC.  Corporations who were severely levered will find it hard to borrow even after credit markets thaw.  Not so much because credit will forever remain tight, but because our thinking will.   Our grandparents accounts of the great depression, and their stories of debt leading to failure are no longer mythical tales of disconnected financial Luddites, bards from some olden time long since forgotten. Regardless of the accuracy of the portrayal of our current circumstances and the numerous comparisons to the Great Depression, truth is that the current financial maelstrom is worse than most anyone living has ever seen.

In my opinion some of the fundamental assumptions of neoclassical economics need to be rethought, or at least redefined.  Take utility maximization.  The original definition of maximizing utility, was supposed to measure some abstract, immeasurable form of happiness.  Instead, utility has often come to mean wealth as a substitute for happiness, and the concept of wealth maximizing behavior is one of the foundations for welfare economics, a fancy way of talking about the “optimal” way of allocating wealth “efficiently.”

Selfish enlightenment or enlightened self-interest is one of the factors that drives Adam Smith’s Invisible Hand theory.  Enlightened self-interest was supposed to prevent excessive greed, corruption, and/or other market imperfections by assuming that market participants would act in accordance with a mythical set of guiding principals and values that would protect the system as a whole.

One of the first laws of economics is that resources are limited.  That said, I’ve always felt a conflict with the concept of wealth maximizing behavior.  While this could be argued sideways, my net thought is that wealth maximizing behavior, as a driving force is flawed.  If everyone always wanted more, and resources would always be limited, we would at some point reach the end of an unsustainable journey.  I do believe that market participants can be led, sold, marketed to, cajoled, manipulated or forced to want more stuff they don’t need, but it is my supposition that the human condition does not in fact always want more (while there are those who do), most people at the very least don’t want less.  The concept of wanting more may have been appropriate in an agrarian or industrial economy, however in a consumption/service economy, people shift their desires from wanting more to wanting more balance, which often includes compromising wanting more stuff for taking more time which in and of itself may not be adding value to the system as a whole.

Market equilibrium is another oxymoron these days.  If markets are efficient, and if equilibrium is supposed to exist, how have commodity prices exploded and plummeted in the blink of an eye?  Did demand skyrocket and suddenly run out of fuel and then turn down and crash?  Did supply suddenly shrink and miraculously expand at warp speed?  The answer to both of these is of course no.  And the truth is not easy to uncover, however, speculation, leverage, and derivatives I’m sure played a large part.  Market equilibrium might have existed in a time when supply and demand were unlevered.  But in the age of leverage (or gearing as it is called across the pond), demand and supply can be grossly manipulated for profit, and as we now know it can happen in the blink of an eye.  The short dollar/long oil trade was a favorite of “smart money” before the Olympics.  It was almost precisely after the Olympics that the trade unwound, fearful that China’s need to window-dress the countries wealth and efficiency would quickly dissipate.

I don’t claim to be an economist, nor all that bright.  But I do strongly believe in the expression that your business is built to run as well as it does.  Extrapolating that idea, I think our economic system has been/was built in a manner that led us to this point.  While we can, and I have placed blame across a great number of constituencies from mortgage brokers to regulators, the truth is everything that happened was bound to happen given the way we were minding the store.

Should I ever find the time, I’d love to write a long post on the Nobel Prize winners who are at least partly responsible for the frameworks that have failed in their current forms.  In the abscence of that, I look forward to seeing how new and old minds tackle the ideological undertow in the race to save capitalism.  Should capitalism fail, democracy soon shall follow.  Those are events we have not explored, black swans in all their forms, but not further from today than WWII was from 1929.

Goldman Takes TARP Funds and Creatively Evades Taxes

December 21, 2008

This post caught my eye this afternoon.  Interesting view from Anthony M. Freed at Your Mortgage or Your Life.  Excerpted with a link to the full text below.

It kills me to think Goldman probably spends millions of dollars in order to avoid billions of dollars in taxes, and then turns around and asks the American people for a handout. [More]

Goldman Sachs Evades Taxes, Takes Tarp Funds
Anthony M. Freed, Your Mortgage or Your Life…, December 18, 2008

Rating Agencies: Damned if They Do and Damned if They Don’t

December 19, 2008

From Bloomberg this morning: downgrades of major banks.  This will hurt early investors in the new capital structures and continue to pressure borrowing costs.

Damn rating agencies.  If they had only done their job before this mess began we would have avoided this scale of disaster.  Now they feel compelled to do things properly, and they are perpetuating it.  Damned if they do and damned if they don’t.

Bank Rating Changes

Bank Rating Changes

Goldman, UBS, Deutsche Are Among Banks Lowered by S&P
Elena Logutenkova, Bloomberg, December 19, 2008

Next Up, Bush in a Dunk Tank

December 15, 2008

So today, as most know, a “journalist” in Iraq tried hitting the president with his shoes, as a sign of disrespect.  The video is below.

I wonder if President Bush might do more for his reputation in Iraq by volunteering at the next Bagdad carnival by being the guy in the dunk tank, like in the video below:

If that doesn’t relieve tension, we could always send elephants to Iraq to throw darts at balloons: