The Myth of Independence

By |2017-07-17T12:35:05+00:00June 13th, 2011|Global Market Update|

Can the ratings agencies be saved? Investors, companies, and regulators all benefit from having a clear and concise way to evaluate credit risk. But the agencies are paid by the issuers—a conflict of interest. Can this be solved? This conflict has been with us a long time. It became significant when the agencies succumbed to the collective insanity of 2004 to 2006—some bonds were rated ultra-safe that never should have seen the light of day. This is the same issue that accountants, newspapers, and [...]

Capital, Capital, Capital

By |2014-09-12T10:46:11+00:00June 12th, 2011|Global Market Update|

How much capital does a bank need? That’s the two trillion dollar question. Two trillion, by the way, is the approximate total loss that the global banking system had to absorb from mid-’08 to mid-2010. Capital is the amount of equity that a bank’s shareholders have at risk in their institution. The lower the capital requirement, the higher the potential return—but also the greater the risk that the bank could be wiped out. If the banks all get wiped out at the same time, [...]

Dollar Drivel

By |2014-09-11T11:25:55+00:00June 9th, 2011|Global Market Update|

Is the almighty dollar dying? With the rise of China as a significant world-economic power, many folks wonder whether the US Dollar’s days as the global reserve currency are numbered. After all, China is growing three times as fast as the US; the Euro-zone is almost as big as the US; and many trade-surplus countries are seeking ways to diversify their exposure to the Dollar. All three currencies face challenges. The Dollar is facing enormous trade and budget deficits; the Euro lacks a mechanism [...]

Angels and Demons

By |2014-09-11T11:23:02+00:00June 8th, 2011|Global Market Update|

What’s stopping small businesses from forming? Some say it’s uncertainty. There’s so much volatility around health care reform, fiscal policy, or regulation that entrepreneurs are worried that policy uncertainty is undermining the economy. If things were more certain, they claim, business confidence would soar and a thousand flowers would bloom. I liken this to the “angels and demons” explanation. If we could exorcise the uncertainty demons, the confidence angels could take over, lifting our economy out of its Slough of Despond and up to [...]

Diworsification

By |2014-09-11T11:21:45+00:00June 6th, 2011|Global Market Update|

Does diversification work? For years finance professors preached diversification as “the only free lunch,” touting its ability to reduce a portfolio’s risk while maintaining expected return. After all, if a portfolio is divided up among different countries, asset classes, and companies, then what drives one down is less likely to give everyone grief. That was the theory, anyway. During the financial crisis, everything fell. A global credit crunch led to recession and fears of a global depression. The only asset that didn’t fall was [...]

Working Hard, or Hardly Working?

By |2014-09-11T11:21:07+00:00June 5th, 2011|Global Market Update|

Where do jobs come from? It’s a reasonable question in light of the recent jobs report. The economy created a measly 50 thousand jobs last month, following gains that averaged over 200 thousand over the past three months. Government employment fell, as did manufacturing jobs in light of the supply constraints coming out of Japan, while professional services and health care jobs grew. But where do the jobs come from? Predominantly, they come from new small, young firms. In a recent study over 60% [...]

As Good As We Want To Be

By |2014-09-11T11:20:09+00:00June 3rd, 2011|Global Market Update|

Are you ethical? Everyone thinks they are. In fact, if you ask a group of people to raise their hands if they’re more ethical than average, almost all the hands will shoot up. Part of this is cognitive bias—most folks think they’re better than average at most things. But ethics is particularly important, because so much of our economy depends on trust. From Enron to Bernie Madoff, we’ve seen that trust broken. But sometimes business practices designed to encourage good behavior actually remove ethics [...]

Cash is King

By |2014-09-11T11:16:15+00:00June 2nd, 2011|Global Market Update|

Is it different this time? Around the world the “new normal” is being promoted as an idea whose time has come. It posits a two-speed economy, in which liberalizing, globalizing third-world countries grow through modernization and trade while the developed world remains mired in a debt hangover left behind from the housing bubble. Since housing is debt-financed and mortgages are a major part of bank balance sheets, the bursting bubble has inflicted long-term damage on the levered economies of North America and Europe. Not [...]

High Fidelity

By |2014-09-11T11:15:49+00:00June 1st, 2011|Global Market Update|

What is high-frequency trading? High frequency trading is a computer-driven strategy whereby firms take positions in stocks and options and hold them for seconds, or even fractions of seconds. It’s behind the tremendous increase in volume on stock exchanges around the world. Indeed, last year high frequency trading accounted for as much as 70% of the equity trades done in the US. Some studies show that such activity benefits the market—higher volume means larger trades can be accommodated, and prices are more consistent across [...]