The road less travelled and life in the new world

black monday 2008I wrote Monday night/Tuesday morning about buying distressed stocks. So yesterday morning I bought Anglo Irish at €2.94 and today they are sold for €4.55 meaning that the idea brought in a 55% in just over 24 hours, it was risky, yes, but it also brought a return that would take about 7 years in a deposit account. Taking into account capital gains tax it is still 45% clean and clear (although I won’t have any as this is the first stock I sold and it the profit didn’t exceed the €1,270).

However, the point being made by the post yesterday was that it is a time of volatility, it is a time of risk and there are problems in the world, but there is also still PROFIT! The type of trading I did is also not advisable for the average person due to the risk attached, as stated in the first post I was willing to lose, to realise a total loss, if you don’t have the stomach for that kind of thing then stay the hell away, but don’t forget, there is still profit to be made, there is still opportunity in the market and there are always going to be people who profit from the fall.

banking bailoutToday we are hearing about the ‘New World’, that is something this blog has covered since the start of the year, but now the ‘New World’ of finance is quite topical, as I write it is being discussed live in the Dail. You might ask, what is ‘New World’? Well, simply put it is everything that ‘Old World’ isn’t and ‘Old World’ is the structure and economic policies of whatever came before 2008. I would not say that we won’t recognise the financial landscape in years to come, but certainly, things are changing and will continue to do so.

Our Government is looking to pass a bill that will back banks to the tune of €400 billion. Lets consider that number, one way of looking at it is with all of the zero’s, but we have done that before. Instead we will look at it for what it represents to the people underwriting the loan, namely the population of this country: 4.2 million people.

How does €400,000,000,000 work out when viewed as a potential debt on 4,200,000 people? It is c. €95,000 euro of debt underwriting for every man, woman, child, infant, grandparent, father, and mother who lives and breathes in this nation. Is that a sum you can afford? Does it matter? I don’t know the answer, I am anti-interventionist at the core of my being. I don’t believe that banks should be saved, if a bank goes bankrupt it doesn’t dissappear, the ownership changes to the creditors, this has happened with airlines and when banks buy other banks for cheap (Lehman etc.). It is a punishment to those who took excessive or mistaken risks and it preserves elements of the business that remain profitable.

irish economy 2008The sole achievement of a bailout is to transfer a huge amount of wealth from people who pay taxes to the people who take risks, and these are risks that were taken knowingly. The issue we have mentioned on this site and also on radio (see links to the right) are about the way that Government intervention can cause companies to act in ways that they might not have otherwise done, and that they may in fact take more risks given the new situation they find themselves in.

An interesting thing is the way that the pro-bailout party talk of ‘domino effects’ and of ‘mass failure‘, but what about market efficiency? If there are profitable loans sought then some firm with the right mix of efficiencies will meet that demand at the right price, there would naturally be a short term fall out but an efficient market would ultimately prevail. If we were trying to argue for the bailout of manufacturing the first thing that even a layperson would state is that ‘China can make it for less’, and that’s an example of the common man/woman understanding ‘efficiency’. Just because a bank is involved doesn’t make it totally different.

If a bailout is promised then it distorts the market, full stop. We have seen that Wall St. banks will not reduce assets to market clearing values as long as the hope of a bailout continues. Interpretation: They won’t sell the assets for 20 cents on the dollar if there is hope of getting 75 cents on the dollar from the Federal Government.

emergency budget october 14th 2008It comes down to fair market values, intervention is merely a prop. Banks would have you believe that property assets are ‘illiquid‘ and nobody wants to buy them, in fact, many people want to buy them, just not at the current asking prices, that gets us back to the ongoing issue of market clearing levels, an intervention now will cause avoidance of the price cuts required to start the market, it will encourage inefficiencies and it will draw out problems for longer than they need to be drawn.

The best intervention right now would be a promise to do nothing. Then industry, private investors, and banks will be forced to accept that there is no umbrella, that will cause markets to meet their true prices, will it cause a ‘run’ on the banks? Perhaps, but that brings us back to the point first raised: other banks will take over these firms and life goes on. Shareholders lose out but that’s the risk you take as a shareholder, the same as the way I took my risk yesterday, I won’t complain about losing any more than I would about winning, the fact is that bailouts do not benefit the common people.

The people who will benefit the most from intervention are those in the best position to manipulate and gain from that intervention. Meanwhile we are in a recession, that means that the two quarters of stagnant or negative GDP are now behind us, the fall in house prices is not over but the speed is not gaining momentum which means we are on the right path, the hard path but the right one nonetheless.

moral imperetiveRight now we are starting into the ‘blame game’ looking to see who was ‘wrong’ or who caused this. Few have the bravery to admit they are part of the problem. Market fall outs are not too far removed from bereavement in which there are accepted stages of grieving, we are seeing the same thing play out through the markets and through the media. In my opinion we are somewhere between Anger and Bargaining.

Have a look and see if these stages don’t compare fairly accurately to what you are seeing and reading, to what is happening in the political arena. Chances are, you’ll see that the cure is simple yet profound and it is acceptance. It’s time to pay the piper.

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