Wednesday, 26 February 2014

The Global Economy As a Craps Game

Investment Banking and global finance is a lot like a big craps game. Maybe with one fundamental change though. Just assume that every payoff in craps is increased by 1/36th. What this means is that the advantage goes to the player. The players are bankers and hedge funds with capital to deploy. The advantage, which I'm suggesting can be expressed as an increase in the payouts for the various bets. I chose the unit of measure: 6 x 6, since all of the bets in craps pay out in various multiples of six.

Call it growth-rate. 1/36 is a little over 2%, and is the basic unit of advantage in craps. There's a premium in our world for doing stuff, so it's not a zero-sum game - and certainly not usually in favor of the house. Who is the House? Well, in this example it would be waste and failed investments. Non producing assets if you will. Think of it like this: There is a huge amount of capital to be deployed at any moment. It can be kept on the sidelines but someone is quietly stealing your chips if you leave it on the rack. We have to lay out the bets. Most are conservative, or at least hedged in some way. A small amount may be place on hard-ways, the field, horn, craps, etc. A lot of ways to lose and make money. Most of us don't do this every day, but the finance guys do.

It's probably enough just to say that they know what they're doing when betting on the pass-line (long, equity investment), don't-pass (short), hi-low (IPO), place (bonds, CDO/MBS, preferred stock,) and crap-check (credit-default swap).

The idea is risk management. Large amounts are laid out on the table at one time and the rolls are cast. Notice how every night the evening news reports the economy is either on a rebound or plunging into the depths of hell? There is a certain volatility inherent in the economy, certainly exacerbated by the efficiencies of information flow to automated systems. Even if we didn't have the wonders of automated trading it still wouldn't change the fact that our entire system is built around our expectations of the future. Expectations that feed on new information. Volatility is like laying larger bets down at one time. I know that doesn't make a lot of sense, but it's supported by the math.

Bankers may have a little longer view than most people on some things. For example, we have 30 year bonds. We cash-flow on a pro-forma basis many years into the future. Our holy discounted cash flow model has all the answers, whose sum (turned into the Present Value of course,) equals our current expected value of, basically, anything. Bankers leave their place bets up and never take their hard ways down. Bankers will acknowledge the 5% disadvantage on the field, but time their bets as to when 4 non-field bets have come up in a row.

My comparison works even better if you realize that at various points in the past, the payouts have been even better. There have been several times in the last fifteen years that the payouts on various bets have been even better. The dot.com era was heavily favored on the horn and hard ways. Maybe up to 100:1 on things like Apple, Amazon, and Google at various times.

The current economy has not only removed the basic 1/36 advantage, in fact it has taken an additional 1/36, maybe more. Money can still be made in the game - and the Fed (the house marker) will loan the best collateralized as much as they need. It's just that their daily play (many times per day for many market participants,) is now seen with a slight disadvantage. There are still plays to be made, but credit risk managers are playing conservatively. Not a lot of horn or hard-ways right now. The point is ten, and we're loaded on the pass line with full odds. Just hunkering down and hoping we don't crap out.

One of the problems inherent to the industry is that these players can't leave the table. Their job is to entice capital with the promise of returns. When the advantage turns back to the players (as it does under lower capital gains and corporate tax rates,) we will see a return to more aggressive game play. Is it? was that at ten? Shooter!!

Rick Bellows is a developer / database architect interested in website promotion and search engine optimization. He put together a website to sell his mother's paintings at: http://www.kathleenkbellows.com
One the side he likes to work on craps simulations in C#.

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Tuesday, 25 February 2014

Oaxaca, Mexico and the Global Economy - No Word For Welcome Book Review

The Isthmus of Tehuantepec is a 120 mile strip of land between the Pacific and the Gulf of Mexico, almost entirely in the southern Mexico state of Oaxaca. It's been inhabited by indigenous groups with different languages and customs for millennia. Since colonial times it's attracted both national and international attention because of its important geographical location and richness of resources.

In No Word for Welcome: The Mexican Village Faces the Global Economy (University of Nebraska Press, 2011), author Wendy Call, a self - described grassroots organizer and researcher, makes an impassioned plea; if not for halting the invasion of the global economy into Oaxaca's Isthmus of Tehuantepec, then for proceeding only after critical evaluation of environmental and cultural impact studies. Ms. Call spent two consecutive years living and working on the Isthmus, from 2000 to 2002, in addition to shorter visits totaling a further year.

The federal government proceeded with its Trans-Isthmus Megaproject by commencing the construction of a four-lane highway through the region, in some cases as a bypass around small Oaxacan towns and villages otherwise connected by potholed two lane roads. It became part of former president Vicente Fox's Plan Puebla Panama, an initiative to extend Mexico's main, relatively new highway system from the US border through to Central America.

The scope of the Megaproject initially included 150 proposed projects including oil refineries, plantations, industrial parks, commercial shrimp farms and a highway - rail network to carry products to national and international markets. The project would inevitably alter both the environmental and cultural landscape. Townspeople opposed development of the region mainly out of fear of the unknown due to a lack of information and consultation. Government and commercial interests were intent upon forging forward.

Call's steadfast contention is that development will result in wholesale irreversible adverse impact to the natural environment, and to inhabitants by altering their means of eking out an economic existence, while at the same time destroying other cultural indicia such as traditions and language. The book centers upon objection to construction of the highway system and the proposed replacement of small fishing operations with large industrial shrimp farms.

In addition to her own personal experiences, in No Word for Welcome Call chronicles family histories and livelihoods as well as opposing individual points of view. This is accomplished by providing detailed examinations of the lives of individuals she came to know intimately in the course of living in the Isthmus for three years, and to a lesser extent through interviewing civil servants and other proponents of the project.

Call's novel-like use of colorful, detailed description draws you in. She holds your interest by weaving together the stories of her subjects (i.e. the activists, the fishermen, the uneducated schoolteacher); otherwise often dry archival evidence of the historical importance of the Isthmus (referencing for example the reign of dictator Porfirio Díaz, the US attempt to buy the Isthmus in the 19th century, and the early 20th century foreign consulates in port city Salina Cruz); the sometimes violent and destructive manifestations of opposing positions (fishermen burning government trucks and dredging machinery and running workers out of town; gesturing with a machete while threatening "if the government doesn't respect the people..."); and her own viewpoint.

You cannot help but become extremely opinionated, either by jumping on Call's bandwagon or being critical of how her political point of view affects the presentation of her thesis. She approaches her chapter centering upon Huatulco, the Pacific resort town created by FONATUR (Mexico's national tourism development agency), with disdain, though she does note positive impressions of its Mexican residents. She seems to mock the government when she writes that the FONATUR office "felt more like a travel agency than a government agency, with overstuffed furniture, brochures filled with beaches and bikinis, and the hollow air of a place with more infrastructure than activity." How else does one attempt to sell tourism, sun, sand and surf?

But it's Call's style of writing, inevitable as a consequence of her very reason for being on the Isthmus, which contributes to keeping the reader at the edge of his seat, either cheering for the cause and hoping that "the people" prevail, or cringing at naivety - the arrival of the global economy in the Isthmus is inevitable and could have been foreshadowed since the 1500s, perhaps earlier.

The description of the lives and hardships of fishermen and their environs is rich and compelling. Yes, perhaps industrial shrimp farms will destroy the mangroves and might have a short lifespan, leaving a swath of destruction. But we're given little in the way of alternatives for the area and its industry.

Both industrialization and the residents themselves have played a part in marginalizing existence and requiring government intervention. But there appears to be a lack of understanding on the part of residents of the complexity of the issue and the part they have played in creating the current conundrum; Call's job is not to educate in this regard. A fisherman surmises that his people have been harvesting shrimp, fish and crabs for over a thousand years, so asks why he should pay attention to some mestizo government regulation banning the use of large rectangular nets. He seems to deny any direct role as a contributor to the problem and states that you cannot trust a government whose solution would create a bigger problem (industrial shrimp farms).

The area has become overfished. Fishermen were not forced to begin using motorboats. They discarded their smaller nets, each of which took a year of spare time to make, in favor of buying the large $100 USD Japanese machine-made ones, and proceeded to trap their catch by extending these new nets across the river's mouth. The result was that small shrimp and other marine species could not get through the nets and into the mangroves to reproduce. The government had to ban the use of these nets in order to protect the industry. The fisherman is adamant that he needs to harvest that much fish to survive.

Many in the fisherman's position opt to head to the US. Call notes emigration in passing from time to time but it's not fully addressed in her book, perhaps because it is not consistent with Call´s thesis. One rarely finds an anthropological writing of this nature which does not deal with emigration head on. But Call is not an anthropologist, and in fact is critical of social scientists, for some reason lumping them together with others working in the Isthmus: "I tried not to act like so many of the journalists, anthropologists, folklorists, and sociologists I'd encountered while living on the Isthmus. They tended to come for just a few hours, days, or weeks, blurting out questions before their bodies had warmed a chair." Perhaps anthropological fieldwork has changed dramatically since my days in graduate school.

The superhighway and a network of smaller roads and rail does result in physically dividing populations, and yes can adversely impacts indigenous culture. Relocating populations into neighborhoods with street names such as Poblado One, Two, etc. rather than retaining names of heroes of The Revolution or pre - Hispanic gods and royalty impacts a pride in one's society and heritage. But globalization is inevitable, for the benefit of not only a few rich Mexicans and foreigners seeking to capitalize on NAFTA, as is submitted in the book, but for the residents of the Isthmus of Tehuantepec.

Of course, as Call suggests, cultural and environmental impact studies are crucial for minimizing destruction of peoples and their lands. And yes, they are sometimes not done or are ignored and politics and power often govern. What I found missing were propositions regarding the least detrimental alternative, which in these circumstances I would suggest, is the best one could hope to achieve, rather than a wholesale halt to all. When subcomandante Marcos' caravan was en route to Mexico City in 2001, and he assured that he would take President Fox the message that "the Isthmus is not for sale," perhaps someone should have suggested a rental agreement with terms maximizing the benefit for the istmeños.

No Word for Welcome is a well - written book, holding the reader's interest from start to finish. I recommend it for prospective visitors to southern Mexico because its descriptions of life in that part of Mexico are extremely accurate, from the workings of local politics, antics, strategies and sometimes destructive forces used to make a point, to the richness of detail, to the lesson in history. The expat living in Mexico will find Call's experiences familiar and reaffirming on many levels (a department store employee is indeed often taken aback when you ask how much a refrigerator costs for cash not credit).

For those interested in the global economy and industrialization or wanting to understand how competing interests are addressed and resolved in Southern Mexico in particular, No Word For Welcome is a must. It's written with a strong bias, and as such it stirs emotion. The reader is anxious to learn how it all turned out, and to some extent is told. Ms. Call's final chapter includes her impressions from her 2008 visit.

Alvin Starkman is a paid contributing writer for Mexico Today, a program for Marca País - Imagen de México. Alvin enjoys taking visitors to Oaxaca to explore more off the beaten track sights, and encourages them to enjoy a diversity of experiences in addition to "the usual." Alvin has written over 200 articles about life and cultural traditions in Oaxaca, consults to documentary film companies, and with his wife operates Casa Machaya Oaxaca Bed & Breakfast ( http://www.casamachaya.com ).

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Monday, 24 February 2014

The Global Economy Is Interlinked - Should More Continuity Be Globally Mandated?

Most folks cringe on the concept of a new world order, and I can certainly see their point, as we have far too many layers of government as it is, still we do need standardization and continuity. After all, the US economy depends on the rest of the world as much as the rest of the world now depends on the US and our strength to buy their products and engage in trade as they build up their domestic economies. Sure, nothing new there, but I'd like to briefly discuss all this with you, especially on how it relates with the potential break-up of the European Union.

Not long ago, I was indeed discussing this with an acquaintance from the UK who has friends intimately involved in policy and banking. We both agreed that the EU has no time to engage in scapegoating or blame-gaming as to whose fault their economic crisis should be hung on. Some there want to blame the US for causing it due to our economic crisis in 2008, even if the London AIG office was an enabler in the whole thing and the EU fed the runaway economic bubble beast - all the while their PIIGS (Portugal, Ireland, Italy, Greece, and Spain) when on a non-ending socialist spending spree. And, let's not crucify them, the Obama Administration is doing the same thing here at home now.

My acquaintance noted; "Current talks are based around what should of happened years ago in the EU, it's all fine and dandy having the Euro but without a governing body to manage all countries debts/borrowing it only lead to abuse of the system."

So true indeed, and consider how correct he is, there are no teeth to ensure financial responsibility, nor does any country wish to give up sovereignty, who can blame them, the history goes way back and there is still the trust factor. I'm almost to point to suggest that the entire banking network go down, no proof of debt of anyone, thus it's all wiped out, "damn, I can't believe this happened, we have to start all over again, so let's, create the ECB as a real central bank like the FED in the US, agree to balanced budgets in all member countries," those that can stay with the new program, those that can't leave, then have those who fall off the balanced budget can go to a second tier program, while the lead nations run the show.

The EU can become the United Countries then par the Euro on the Dollar, and Canadian Dollar. It would be kind of like a giant reboot, but there are other implications to all that, the interim chaos, and issuing vouchers for debt holders to be exercised like a timed release vitamin capsule to prevent run-away inflation.

Well, this is an interesting topic, one we often discuss at our think tank. If you have anything to add, let us know, until then please consider all this and think on it.

Lance Winslow has launched a new provocative series of eBooks on Economic Issues. Lance Winslow is a retired Founder of a Nationwide Franchise Chain, and now runs the Online Think Tank; http://www.worldthinktank.net

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