Harry’s Place has departed from it’s favourite theme to look at something which we should all be thinking (worrying?) about – the future of pensions.
Not seen much about this in the media analysis of the current downturn, but it would be interesting to see what the BBC big beasts Flanders and Peston (sounds like a music hall act) have to say about it. The book this post is inspired by was written by actuaries not economists.
Food for thought.
Following on from my last post I now want to explore the murky world of short selling. I think the principle of how short selling works is pretty straightforward, in a few words it is taking a bet that the value of an asset is going to go down. The short sellers (shorties or shorters?) borrow the asset from an owner and sell it with the expectation that they will be able to buy it back more cheaply and return it to the lender, the shorter makes money by pocketing the difference. Wandering around the blogoshpere you can find numerous more detailed explanations than this, you can also find plenty of people who think that shorters are evil incarnate. I’m not sure entirely agree with them as it seems to me that if you honestly believe an asset is overvalued you are applying market principles by betting it will go down. Of course if you short a stock by starting dodgy rumours then you are morally bankrupt and deserve all you get. But I am not really interested in the shorters motivation, that is obvious as they stand to make a lot of money out of the transaction if they get the bet right, what confuses me and it seems lots of other people is why would the owner of an asset lend it to someone who is trying to make sure it goes down in value?
There seem to be a number of transparent reasons why the lender would provide the service including either they are paid a fee and/or can get some short term cash. Both of which are very plausible but I feel like I am missing something because although the fee and cash means you are making money out of what is probably an inactive asset you are allowing someone else to potentially destroy a substantial part of the value of that asset. According to the information on the International Securities Lending Association suggests that a ‘typical’ trade might look something like this,
A shorter borrows 100000 shares at £10/share, giving a loan value of £1M.
The lender might expect to earn a profit in the order of 5% on the loan so if the transaction lasts a month they could earn 5% * 30/360 * £1.05M = £4300 (approximately).
This all seems straightforward except if the shares are shorted by the borrower and drop by 10% the lenders asset is now worth 10% less or £100,000.
And it’s this discrepancy that I can’t understand, it could be as simple as the lender not knowing or paying attention to who their assest get lent to – but this would be dissapointing. Or more likely there is something I have missed about how this all works becuase it doesn’t seem like good business on the face of it.
First trip to the RSA of 2009 was to see John Kay talk about his new book ‘The Long and the short of It’ I went with Mike who I met though fleshisgrass and who coincidentally joined the RSA at roughly the same time as me, so after a somewhat prolonged absence this has galvanised me to write another post. Things that tipped the balance included the fact that the economy has got to be worth thinking about, Stephanie Flanders has returned to work and I can’t wade through the 100’s of comments on Robert Peston’s blog to make any sense of what is going on.
The main room at the RSA was packed to the rafters with people who as I found out may have been been there expecting advice rather than education and debate. Because it seems John Kay has written a self help book for people with money to invest (is this still a large enough target audience? I wonder sometimes when you read some of the worst predictions about the economy). Mr Kay believes that the time has come for us to stop relying on the professionals and take responsibility for what happens to our own money. Difficult to argue with the principle of this but the wilful ignorance that a lot of people have when it comes to finance makes me doubt this will take off in a big way. However this didn’t stop the event being both educational, interesting and at times amusing.
A slight diversion here to talk about the chair for the evening Peter Jay who is a marvellously posh and well connected chap who must be fairly unique in having a career that spans the Royal Navy, HM Treasury, Journalism, Rupert Maxwell and being UK Ambassador to the United States. Since 2003 he has been a non-exec at the Bank of England, none of this stopped both Mike and I remarking that he reminded us of the recently departed John Mortimer. All of this meant that any thoughts about the links between his background and career trajectory were swiftly forgotten about.
Anyway returning to the main business of the evening. The lecture was structured around explanations of what has caused the current financial crisis, what the Government (or Governments) could do about it and what we can do about it ourselves.
The explanation of how we have got into this mess was one of the clearest I have seen put forward. We learned the difference between investors who are interested in fundamental value and those who are interested in the current and short term value of assets. Basically if you invest based on Fundamental Value then it’s a long term game where you are interested in the income stream that asset will bring you over it’s life. If you are more short term then you will be into Mark to Market which is the value that people will pay for the asset on the current open market. To illustrate the differences in this approach Mr Kay talked about Warren Buffett as the archetypal fundamentalist and George Soros the marked market man.
Whilst these 2 different approaches aren’t necessarily right or wrong – if you want to measure success in financial terms Buffett and Soros have been just as successful as each other – they will deliver different outcomes over different timescales. And when you start to think about it like that you can see how having complicated financial assets, so complicated nobody understood them, the value of which is based on what people are prepared to pay can very quickly lead to big problems. Problems that quickly get out of control and seem to bear no relation in scale to the event that triggers them. This actually has a link to structural engineering where various previous failures, most famously in this country Ronan Point flats in East London, mean that buildings are now design to avoid disproportionate or progressive collapse. This means damage to a a small part of the structure should not lead to collapse of all or even a large part of the building. Now obviously there are limits to this otherwise we would all live and work in concrete bunkers but there are other precautions taken to further protect vulnerable buildings which are exposed to greater levels of risk than normal. It seems to me that the we could do with something like this type of approach when designing the new regulatory system for the financial sector, the regulation of structural design has not stopped innovation but has provided clear boundaries and guidance on what is acceptable.
The vulnerability of complex financial markets to disproportionate collapse is one thing but John Kay offered an impressive degree of clarity on the main cause of the failure . Which as with most things in life wasn’t that complicated when all was said and done, a bit like Bill Clinton’s rallying cry ‘it’s the economy stupid’ Mr Kay repeated several times the cause of failure was the banks investment in the international money markets. A lot of which went spectacularly wrong. I think this where my point above comes in whilst it was the massive securatisation of debt that is now being acknowledged as the route cause of the problem, what is need now is regulation that prevents financial structures so vulnerable to progressive collapse following failure of one or two elements – in this case the American sub-prime mortgage market.
Because this post is getting quite long and because he didn’t talk about it very much I won’t be dealing with John Kay’s second point which dealt with what Government or society should do to prevent similar occurrences in the future, although it is probably clear from the statements above that I think there needs to be afundamentally different approach to regulation, governance and oversight. However, one anecdote did stick with me which was about how when John Varley from Barclay’s complained on the Today Show about poor regulation Mr Kay felt it was a bit like burglars blaming the police for not stopping them stealing from houses.
The final part of the talk concentrated on what seems like (I say seems because I haven’t read the book yet) the aspect which is most like a self help manual. This is advice about how we might invest on our own behalf as we are the only ones we can really trust. I hope Mr Kay didn’t mean this as if I can only trust myself life is going to be quite disappointing. However, he seemed like a reasonable and sensible chap so I will assume we don’t have to take this too literally. The real meat of this sections was about how the average member of the audience (of member of the public? as discussion for another time would be comparing the RSA audience to the general public) could manage their investments better than the professionals. If this sounds interesting I suggest you buy the book where it will be explained much better than I will here. To my mind however it would have been better to get views on whether there are some more radical options for the future of the financial system. The worst of the predictions about the state of the economy would mean that a completely different model is required rather than more active engagement from ordinary investors.
During the Q/A Mr Kay managed to avaoid his self imposed rules (don’t make predictions or offer investment advice) for the most part but he did also avoid explanning why the owners of shares would want to lend them to traders who want to short sell them. The questioner pointed out that by lending your shares to a short seller you are encouraging the destruction of the fundamental value.
I seemed to have ended more critically than intended because this was an informative and interesting talk by the end of which I found myself agreeing with Peter Jay that John Kay is a highly intelligent chap who can explain complex ideas in a engaging, clear and straightforward fashion. Also I have the topic for another post which will be finding out why owners lend their shares to short sellers.
spending too much time on work stuff to muster the the energy for blogging and all the excitement of our party at the weekend took some time to recover from – getting too old for drinking 2 nights on the trot.
The continued lack of TV (the cable box is kaput) means I have returned to the bosom of radio 4 for my entertainment. So thursday tonight I listened with with interest to a programme about Leicester (sounds unlikely doesnt it!) which described how it was shortly to become Britains first plural city where “no one group” would be in the majority.
I was quite excited about this because there has been an unmitigated stream of bad news recently and my exposure to the boycott campaign, truthers and recently the BNP stuff has somewhat dented my belief in humanity. The reason I was so hopeful is tied up with my belief that DIVERSITY is good and we should have more of it. This is because it makes , systems, species, populations, communities, organisations well just about anything I can think of stronger.
For example research carried out by the Equalities and Human Rights Commission shows that if you aren’t prepared to recruit from the widest possible talent pool there is plenty of evidence that shows you are missing out on tangible business benefits, I have included below an extract from ‘Talent not Tokenism’ which says it much better than me.
“Yet many of the companies featured here have found that what may have begun as a way of making sure they are doing the right thing either legally or morally has had tangible benefits for their core business. These include:
After a while my brain did finally kick into gear and remember the the internet is a rather good example of a system that is dependent on diversity not just strengthened by it.
Returning to the documentary – Leicester has had large ethnic minority population for over 40 years so much so that in the early 70’s the local paper declared that Leicester was full and couldn’t accept anymore immigrants. But since then the communities have learnt to live in greater harmony and they city is seen by some as a model for multiculturalism.
So why from the start was I slightly disappointed by the whole thing? After all we live in a very multicultural street where no two adjacent houses contain people with the same ethic background, I only mention this because, in my white middle class way, this is one of the things I like about our street.
Well at the beggining of the show the reporter was at a regular dinner event called the ‘thursday night club’ this event was full of successful local businessmen we were told. So far so Radio 4 documentary, but this scene was a microcosm of the whole story really. We had one successful group (successful Asian businessmen) who had done very well since moving to Leicester, but there was no sign of any women and there didn’t appear to be a great deal of interaction with other groups.
As I write this I wonder am I being unfair and will this just turn into a rant or a whinge? Well lets hope not and to avoid that I will try to link this back to my thoughts about diversity being good (thank you fleshisgrass for that suggestion) and why I found that vignette so disappointing.
Even in what is billed as the most plural society in Britain the different groups seemed to get along by not really interacting with each other and then when the new immigrants were not quite a good as the old ones (who seemed to be richer and dare I say it less Muslim) particularly in the view of some of the locals.
The BNP answer to this is that it’s human nature and evidence can be found by the study of primates. It seems a bit risky the BNP comparing human and ape behaviour but I won’t dwell on that. When I read that I wasn’t sure whether to laugh or cry. The point of evolution and society is that we have learnt to subjugate some of our basic animal instincts for personal gain and the common good.
Yes we feel threatened by the ‘other’ and concerned by change but behaving badly in the face of this and blaming it the fact we are descended from apes just won’t wash. What is needed is help and support for people to accept different groups for what they are and to work together to form strong diverse and thriving communities – not a series of separate communities that don’t have a problem with each other because they never interact.
This probably sounds hopelessly idealistic but I don’t think it is, what it will be is hard work. What it will need is strong and responsible leadership from central and local government and a lot less scaremongering by the media.
I seem to be consistently drawn into arguments with ‘truthers’ who believe in various outlandish theories about the terror attacks carried out in America on 9/11. In fact during my short blogging and commenting career I have spent more time on this than anything else. This is partly because as an engineer by training I have some professional interest but also fleshisgrass did mount a campaign to get me involved.
Having done so it has been an education in a number of ways. I have learnt a lot more about how the twin towers and WT7 actually came to fall down including why they are unique but not surprising events.
But more than that I have been exposed to conspiracy theorists in a way that I hadn’t been previously. This has at times been entertaining but mostly just frustrating. Most of the conversations rapidly descend into what feels like one of those conversations with a child where they ask an absolute barrage of questions without considering the answer to the previous one. As far as I can tell asking questions is the big thing here and if you don’t do that you are either hopelessly naive or a government stooge.
I haven’t seen anything that actually amounts to a consistent theory about why any one would have wanted to put in place such a conspiracy (apart from the terrorists of course who did take the time to admit to this and try and justify it) which is surely the one question they should be asking?
So it just turns into trench warfare with the winner in the comment battle being the side who can keep lobbing refutation bombs longing than the other one. But still in the end the truthers will not acknowledge any possibility that there isn’t some huge conspiracy to either do something to us or hide something from us. No evidence is good enough for them and all experts are merely part of the problem.
On the other side those of us who are fighting the truthers don’t appear to spend enough time thinking about their motives or considering different ways of engaging with them. Why are they desperate to believe their government is conspiring against them? Why don’t things that seem obvious/rational to us (such as the fact that if a massive building is collapsing there will be loud bangs that could be mistaken for explosions in the confusion) seem the same way to them?
I haven’t reached any conclusions yet but will return to this, I think it is these questions that will help us to win the truth war rather than just the battles.
So it looks like the dire state of our economy might have some benefits I didn’t foresee. Namely we might now be able to have a sensible conversation about joining the Euro and working on further integration with our neighbours, all this without cowering before the little Englanders banging on about the Great British Pound and how they will talk our bull dogs away or something. Just a quick aside but what made the pound great? Well you could point to our role in the industrial revolution and consistently level of innovation but I don’t think we should forget piracy, slavery, aggressive foreign wars and human rights abuses but maybe that’s just me.
However back to the point, there seems to be a growing amount of discussion on the blogs and it came up in the Observer this Sunday. The EU is even letting misshapen fruit and vegetables in so perhaps the UK has a chance.
All the pointers are that things are going to be pretty dire in the next few years and then once we have recovered from that the climate might get us. So what’s to lose? Our influence with the US and other major powers? Well frankly this is more illusory than we care to imagine and is based on our over reliance of the City which is broken and our nuclear arsenal (which keeps us as one of the 5 permanent members of the UN Security Council) – which as more people get their own is starting to become less relevant.
Add to this the fact that trade with other European countries makes up over 50% of our exports and you have to wonder what the objection really is? If the market is saying the euro and the £ are converging in value shouldn’t we listen to the market? We wouldn’t be immediately giving up soverinty and sticking the Queen in the Tower of London – mostly we would be banding together with like minded countries to make something that is greater than sum of it’s parts. At least we would have a currency which is seen as a global reserve and much more stable.
Fundamentally I think that being part of a bigger group makes you more secure and should make you behave better as you have to get a consensus and do things for the common good. Also I like the other Europeans nations in general and my recent experience from visiting their capitals and meeting people is that surprise surprise they really are quite like us! Also you can get their by train – in fact apart from the channel you can almost walk from Europe to China.
Very short post on Arab Media Watch, which is basically to say are they having a laugh? Of all the descriptions of John Pilger I could muster ‘objective’ is not one of them. Does the Arab world need this lot? Surely they are getting on fine with their own media and anyone who is interested enough would go to the source not this blog? Yes it looks like a blog to me and not an objective review of the reporting about the middle east.
If they want to address what they see as an imbalance then maybe that is OK, but to call stuff like this objective is pushing it bit.
Slightly gushing I realise but at the moment the RSA is second only to the BBC (expect soon I love ‘In Our Time’ and Melvyn Bragg is my other hero – sorry Matthew) in my list of things that I think prove that the barbarians are not even in the same town let alone at the gates. In what is increasingly supposed to be a celebrity obsessed and dumbed down country the resurgent RSA fills me with hope. Why might this be?
They have the biggest free public lecture series in the world (strictly I think this is biggest outside academic institutions) which covers serious topics for sometimes up to 90 minutes without a break, yes people really can concentrate for that long. These events cover politics, economics, the arts and even some fun stuff in a structured and engaging way which more often than not leads to real insights.
The lectures are broadcast live on the web and are then downloadable from the website, so RSA geeks like me can carry them all around on our MP3 players.*
They have a purpose and vision that they actually put into action. For example The RSA Academy at Tipton and their new curriculum framework Opening Minds.
They have a huge range of speakers and contributors from Clay Shirky to David Cameron to Robert Peston to Jack Straw ( at least twice so well done Jack).
Matthew Taylor is a proper clever person who seems to have coherent and interesting things to say about almost any topic you care to mention, he must have a brain the size of a planet. Annoyingly he seems like he might even be quite a lot of fun too. Also in a marvellous piece of circularity his dad is on the BBC!
Lots of people I know in my work and private life seemed to have joined or started attending in the last 12 months, and whisper it quietly women and ethnic minorities are reasonably well represented.
They have a strange but interesting building that is a bit difficult to find your way around and surprisingly you can go in at street level in John Adam Street go down a flight of stairs and end up on the Strand.
They have lots of ways to get involved which are both run by them or started by members, I have been tempted to try and help out Primethinkers which helps individuals and the voluntary sector develop business ideas.
So what’s not to like? Free lectures which are educational and fun with the opportunity to build some social capital. Finally it gets me away from work and is an interest that doesn’t involve drinking or watching TV.
* I do have a small gripe though – they aren’t podcasted and the file names and info are not very user friendly.
It would be nice to think that by the time some of today’s veterans are in their 100’s we will have stopped adding to the list of those we need to remember at such a rate of knots – given the present amount of conflict in the world this seems unlikely.
Two things really brought it home on Sunday the amount of human sacrifice there has been this century alone. The first was Jock Stirrup who when being interviewed informed us that British Service people had died in every year bar one since the 2nd world war. This is a tragedy not only for them and their families but those on the other side of those conflicts.
The second thing that did it was the Robert Capa and Gerda Taro exhibition at the Barbican. It reminded me that I know next to nothing about the Spanish Civil War, Flesh summed up how strange and horrific the photos were by thinking out loud that it would be a bit like somebody knocking on the door and asking to go to fight on Hampstead Heath. The exhibition ended with WWII where Capa was on on hand from the start of the D-Day landings to the end in 1945. The courage of these Citizen Soldiers never ceases to amaze me and I feel lucky beyond words that I am not from a generation that has had to go through that.
After all that emotion during the day it was probably a mistake to watch Schindler’s List which did rather get the better of me, quite why the site of the actual survivors did it I am not sure but there was defintely some blubbing.
