Posts
Currently the world financial markets are undergoing a remarkable spike in positive sentiment, with many of the most vocal bears becoming reformed bulls.
The question the bearish camp are probably asking, and I am one of them is, “what happened?” “did I miss something?” To add fuel to this burning stock market rocket the earning season has begun with a Watusi and Asian Economies are suddenly showing statistical signs of economic life.
So let’s try and understand whether the bears have it wrong and the worst is over, or are we just going through a phase in the bear cycle. I was having a cup of coffee a short while ago, and I thought the following analogy may explain some the more recent bullish behaviour. But before I begin I must add I have been working for months on a hypothesis that time perceptions create a kurtosis in the symmetry of the zero sum gain certain market theories support and lies at the heart of my analogy.
After looking for a home for more than 6 months Brad finally finds his dream home for his beautiful and large family. Brad and Angelina are keen to step things up a bit from their existing 8 bedroom home and their interest lies in a 10 bedroom mansion overlooking the Sydney Harbour bridge in prestigious Point Piper. Brad realises that he will need to step it up a bit to meet the monthly mortgage repayments as this is a whole new league with a hefty price tag of $30 million.
After gorgeous Angelina has called all her friends to tell them about her new home and the beautiful parties she will be having for the crew, Brad sits down to do some hard financial analysis. Actually Brad is not a numbers guy so he calls Abie his trusted accountant and says, “Abie come on over, we need to go over some figures.” Unfortunately for Abie it wasn’t the kind of figures he was hoping for as Brad had been told by the government to cool it with his extra-curricula activities.
The picture starts becoming clearer, Brad is good for $20m and he will need to borrow $10m which at the current interest rate means he will need to repay $50,000 per month for the new home. Brad is a resourceful kind a guy and although he isn’t working right now he is sure he can make it all happen. The day for settling the purchase of the new house looms, and Brad is feeling the heat. No it isn’t the Sydney moist summer heat, it is the heat from the bank over how he is going to pay them back every month when he is in semi-retirement. To add to his financial woes Brad still needs to come up with the $20m down payment, and he is having difficulty laying his hands on it. Not because he doesn’t have it but because a lot of it is tied up in investments that have stiff penalties should he wish to exit early.
Brad is starting to wonder why he got himself into all this stress as he was renting a most beautiful apartment on the North side of the bridge and he was sitting on a pile of cash in the bank. As quickly as he thinks about his reasoning he sees the beautiful Angelina and the 5 kids and he knows he has made the right choice. After a couple more weeks of hectic administration Brad and Angelina pick up the keys to their beautiful home having settled the purchase price to a former investment banker who has now had to sell his house to pay for his margin calls on the stocks he had been buying without telling his wife.
Brad has been cautious on advice from Abie and he has stashed a quarter of a million dollars in an account to cover the mortgage repayments for the next 5 months. It is all happy days in the Brad and Angelina household, the parties start rolling and before long all the socialites in the Brad and Angelina circle are having function after function at this most magnificent address, even Brad has forgotten about the stress that he had encountered in making this dream happen. It is simply happy days and Brad is very forcefully shutting out of his mind the fact that 4 months have elapsed and that with all the entertaining and jet-setting the cash resources in the household were fast depleting. A further concern was that many of Brad’s investments in other assets which he had hoped to live off for a while if not until he died were starting to turn sour.
In essence Brad now owned a house for $30m but could be worth closer to $25m as he was an eager buyer and pushed hard for the deal to happen, and the market had suddenly changed. His other investments were not worth what he thought they were and his cash flow was looking extremely anaemic. This story of Brad and Angelina continues in cycles of fear, resentment, hope, anger, joy, etc, for the life of their ownership until they have either paid the house off in full, or to an affordable level, or sold it and downgraded to something they can afford.
I believe this story is symbolic of the current financial crisis. Just like Brad secured a 5 month kitty, he was then able to dismiss the dire state of his finances and proceeded along normally, actually very happily. It wasn’t a lie, for Brad the reality was all was well over those 5 months, he wasn’t thinking beyond so his reality was positive. Again things took another bad turn for him he was able to dig deep and come up with a nice little deal that bought him another 2 years, and so the cycle continued. Yes the bears have painted a bleak picture and yes the economy and the world financial markets stare down an abyss of horrible consequences, but Brad and his counterpart society at large are resourceful and resilient and will continue to fight hard for their investment.
As bears we need to accept that in terms of our perception of reality which incorporates the entire picture which may take 10 years to fully unfold, there will be many periods of lucky deals that provide grease for the machine to continue ticking over and the system to appear sound. We need to roll with these waves of emotions and be ever vigilant to the fact that maybe just maybe this will be the one time that Brad either goes to the banks and says here are the keys or in facts sells it for half its purchase price.
The forces driving our financial markets are groups of people and corporations each with their own perception of time. Some people involved with investments assess them hourly, daily, weekly, monthly, quarterly, yearly, etc; it is through the disequilibrium of these perceptions of time preference that cycles form into a reality that is diffuse from the underlying fundamentals, but is reflective of the overwhelming time preference of the dominating society at that particular point of overlap.
I look forward to making this all seem a lot clearer by setting it our more robustly in an algebraic statement.
Michael
No comments:
Post a Comment