Dynamics: The gut of the "monster"!

This is an entry from 2007 (Thursday, July 26, 2007) from my old blog, before I moved into vlogging and then back into blogging. I think it is quite relevant today.


Dynamics: The gut of the "monster"!!!

I am as capitalist as anyone, but I have to admit that the state, dynamics and systemics of credit and finance seem to have assumed a life of their own in the world.

The system seems IMO too large and complicated not only for investors (direct participants) and their analysts, but also for those, like me, who are merely trying to figure out how its general dynamics affect the other dimensions of our lives.

Capital is the oil that keeps the system, as it is, going, loans, bonds, stock (equity) et al.

At the core is the willingness of people to make money out of money, ie "pure capitalism". By lending it or (riskier) by taking an equity share (stake) in ventures (stock), mainly.

In many stockmarkets, the investors are by now mainly "institutional", ie funds and other "collective" investment formats. "John and Joan Smith" are not that active. They opt for more tangible capital options, such a real estate and the money they can store (save) and make out of rental and via price increases. Because one does tend to feel more "secure" when the so called underlying asset is not a company (ie a legal form, albeit with its assets and its liabilities and its profit and loss accounts and net present value of future earnings or dividends) but a tangible "thing", ie a piece of land and bricks or a flat etc.

Well, here is how things seem to stand at the moment:

Many indices (of stock markets) have been trading at their highest levels in recent years.

Why?

Well, for one, low interest rates that allowed companies to borrow at lower cost and thus make higher earnings.

Low interest rates which prompted people to borrow money and to spend money. And companies too. Hire more people, and thus fuel their spending.

And in general, an economy that was dynamic and upbeat or confident. In what? In state and outlook, in spite of various negative parameters.

And the up meant a cascade of upwards factors and synergies. Win-win? Sounds like it, but what goes up must come back down, eventually, right?

Well, in recent days, stock markets have fallen worldwide, yes worldwide, like they are tanks interconnected, because they are, and that is the slightly scary realisation (globalisation of the investment decisions, "one big ocean") amid concerns about the effect of the fact that interest rates are in most cases (see eg UK, USA, Eurozone, higher than recent years) and their effect on the profits of companies with traded (public quoted) shares.

As well as the effect on corporate takeovers and as well as loan defaults by individuals and companies, as a cascade effect.

But who has a crystal ball, even the world's most genius economist? Who can safely "read" the whole system and predict the future with 100% certainty? No human and no machine, even, I think. Even if one can, at almost 99% accuracy, what incentive does such a person or fund have to "share" the knowledge? When in the financial markets, such "knowledge" is more valuable the fewer people that have it? Only a fool would share such uber valuable information, other than himself and his investment clients, at best. Assuming again that he/she had it.

Most do not have that "sure" thing knowledge and thus the whole system is driven by analyses, "opinions" backed by theory and understanding, at some level, of the systemics, and, when humans are concerned, by "confidence" and other emotions.

Wow, sounds more complicated than the universe.

Well, it is, a financial universe. Part of a wider universe, that of human life and its systemics and dynamics. Fascinating but also abyssal. Like Star Trekking!

The worries "of the markets", news reports say, are nothing new, and analysts and investors have been warning that a number of factors and parameters are combining to create worrying conditions in the markets (systems) of equity and credit.

In certain countries and areas, house price are increasing, in others they are volatile and in others they are lower than recent years.

Key central banks have been raising the central interest rates in order to keep another "monster", inflation, under control.

Why?

Because inflation is a "boogie man" for most economists.

Why? That is another ... post!

At the same time, to make matters worse, high oil prices are said to be raising fears about their effect in inflation. Who has power over the price of oil?

And how hungry is our way of life in fossil fuels?

Scary, even without the added factor (mega factor) of climate change.

And if the earth ever becomes too warm or too cold for us human to live, well, then game over, not only for us, but ... for the capital markets too, unless they are taken up by ... robots (who will btw, ex officio, be ultra rational, uber "rational investors", unlike us humans).

When "returns" seem uncertain, when there is less confidence, the system turns towards more safety, ie less expected risk, aka "quality" investments (!!).

On the other hand, people who are more risk converse may see this as an opportunity to buy into less expensive riskier investment options.

Who is right? Go figure! I am only human. And at best, an MBA and a philosopher. What do I know? That in the long run things usually even out and that in the long run, as my statistics professor used to say often, we are all dead. But markets are driven by hope as well as analyses and figures.

That leads me to say that they have a life of their own.

Scary! As scary as a runaway train! But in the medium term, not the long, things are usually not that bad. Even the stocks that sold for almost nothing in the Wall Street Big Crash 80+ years ago, many of them regained and grew in value in less than ten years!

That is why some people say that one should invest only part of one's savings in assets of some risk and that it is good to have some underlying asset. That is why my parents and their friends were into real estate. The price of land does go up and down, but the land is always there, rain or shine. But when you have borrowed to buy that land and you still owe payments, well things are a tad more complicated. But then what is not complicated in the world today? Relationships? Sure, not! LOL

"May you live in interesting times"
An ancient Chinese curse, not a wish!

But at the end of the day, it is only money. Yet, but the whole system runs on money and ... fossil fuel.

Yes, I believe in capitalism, the capitalism of human capital and of intellectual capital.

And companies consist of humans, not just legal and physical and monetary assets. And unlike my parents, I put more faith in humans. But that is my philosophy. And I am by no means an expert on finance. Only took a few courses in business school. Enough to help me try to understand. But the Ancient Greeks taught us that the more we know, the more we realise how little we know. Does the same apply to money markets? Who knows?

All I know is that it is prudent for someone to live within one's means and be ready to slim down his/her costs of living. That is why I hate debt. But, in fairness, many disagree with that mantra.

Can one be a capitalist and hate debt?

I think one can. Many may think otherwise.

We think therefore we are. But we also need a few more things than that to survive. Food and a few more. Athenian (hedonistic) or Spartan (austere) way of life? Alexander the Great who conquered the world and then died or Diogenes who lived in a barrel? Taking risks or playing it safe? How much risk and how much safety?

Unlike companies, people are not expected to live forever.

Capitalism of the mind.

IMO, this 21st century is the century of why, not how. And the century of Philosophy. But I would not bet on it.

Humor and philosophy can make hard times and "bear markets" easier to bear. Other people think that it is money that makes unhappiness more bearable.

We think and feel, therefore we are still alive. Do the markets have the same "human" attributes? And who has more greed? For a) returns/money and the things they can buy or b) for living and the pleasures living gives?

Hedonistic capitalism?

So many potential versions of capitalism! All can co-exist. Which one is more/less risky?