Hedge Funds and Global Liquidity

Oh dear it seems as if Bear Stearns may be in a little trouble as it coughs up $3.2bln to support one of its hedge funds exposed to the US subprime market.

This is not good news at all but the market has been through this before with the Long Term Capital meltdown in 1998 and of course the 1995 collapse of Barings Bank by Nick Leeson. So it won’t be in complete panic but this is a big move to Bear Stearns and perhaps just a taste of what can go wrong when the music stops.

Hedge funds are heavily leveraged and so when a big move goes against them the losses can be astronomical. In theory risk models are supposed to flash warning lights at set points but the reality is that these models are not foolproof (after all we designed them) and traders can often disguise bad positions. And from my experience all risk is underpriced since it is based on average volatility and not the heavy meltdowns that come with increasing regularity.

The last 10-15 years has seen a huge amount of money created by the worlds’ banks and much of that finds its way back into the financial markets to be invested or used as speculative margin. The numbers are so huge that the Fed in the US has decided it would rather not publish money supply numbers anymore.

So when the market goes into reverse it can cause major losses which have knock on effects around the whole system.  It will be interesting to see how this situation pans out but at some point there will be a serious contraction unless new demand can be conjured up.

RBNZ: Have They Lost the Plot?

There has been a lot of hand wringing over the recent Reserve Bank’s intervention in the currency market. So what’s the story here?

Well the RB has a clear mandate to keep inflation, as measured by the CPI, between 1-3% on an annual basis. According to them they also say that,

“The Bank is required to ensure that, throughout the economy, money works as well as possible as a mechanism for making transactions, storing value, and keeping account.”

So let’s say they are also responsible for price stability in a general sense i.e. no serious asset bubbles or major deflationary shocks.

So how are they doing?

Since 1998 the CPI has risen 20.7% to December 2006. So an average of 2.5% per annum which is within the prescribed band.

But the key worry, or so they keep repeating, has been the housing market which in the same period has risen 143%.

So what have they done about it?

From Mar 04 to Dec 06 they raised interest rates by 2%, from 5.25% to 7.25%. That doesn’t sound like a great deal by historical standards and clearly has not had any impact.

From Mar 04 to Mar 05 rates went up 1.5% as inflation took off towards 3%. However, they stopped when they should have kept going. When CPI hit 3.4% and stayed above, the bank should have got really serious and jacked rates up very quickly.

They didn’t. CPI was above 3% from Sep 2005 to Sep 2006 and they moved only 50bp. This was their big mistake. With house prices on the march as well they should have had rates up to 8% by June 06. They are a year behind the curve and that could cause some major problems.

Alan Bollard has been soft in his approach and this may well stem from the false comfort that low global rates has brought. The great inflation crush of the late 1990s has seen global rates fall into ranges not seen for many a year. Central bankers have been playing in a very small range and have been lulled into a false sense of security.

All around us we witness the asset price bubble caused by cheap global credit. The Japanese are still at it pumping out cheap yen that no one really wants. This is a major disaster waiting to happen. We’ve seen it before when USD/JPY fell to 79.65 back in 1995 on the back of US trade concerns and Asian Central banks dumping their US$. For now the flow out of the yen and into the kiwi continues with a rise of over 15% in the last 6 months.

Yesterday Winston Peters called for an amendment to the Reserve Bank Act asking that the Reserve Bank take a more rounded approach to managing monetary policy. I have to agree with him that a major review is needed and that simply using the OCR to control the economy is not working.

Submissions for the inquiry into a future monetary policy framework close on 19th July. I will post my submission up here in due course. It’s a great opportunity to throw open the arcane nature of our monetary system and make proposals that may lead to a more productive and stable economic system.

The Future of the Web

Following on from my previous piece I have just viewed a couple of interesting videos projecting how the web may develop in the future courtesy of Richard MacManus.

Whilst there is a certain amount of PR spin and product placement going on here they are both worth a look at if you have a spare 15 minutes. As i noted previously it is reminiscent of the 1920s and the media battle that took place from there on. Same stuff, different technology?

You can catch them here

Food Miles - Consciousness is Growing

Barely a week passes without a new campaign in the UK around the issue of food miles and NZ produce. Though this has been thoroughly debunked by the report from Lincoln University the story continues to rumble along.

This is just the beginning of a more serious debate on the issue of environmental costs otherwise known as externalities. Food miles is just a simple way of engaging the public and media just as the phrase “think global, buy local” has always done.

We all like to support our local farmers whether in NZ, UK, France, Japan or the US. However we all like to sell as much as our produce into markets where we can achieve a better price (even after taking account of transport costs). NZ is heavily geared towards exporting and with a large productive base and small local market it is more exposed than many other larger countries.

Stepping away from the hype and hysteria we can see that the Food Miles debate is both important and necessary. Consumers should be paying the full price for the goods they buy and that includes the basic inputs of energy and matter as well as ecosystem goods and services.

Whilst food miles comes across as a marketing ploy and is somewhat simplistic in its formulation, it can be seen as the start of a serious attempt to bring Trucost pricing into the mainstream economic system. Of course it makes sense to buy your veggies from the farmer down the road but the supermarket system is all pervasive and has driven costs down so far that they have been able to get away with an international supply chain as well as shipping domestic produce many miles further than necessary.

Pricing ecosystem services in at the primary level would see a vastly different pricing mechanism: one which included the price of nutrient and effluent run off, mining run off, soil depletion, air quality processing, clean water provision and the numerous other services which have enormous economic value.

If this happens then maybe we can relax a bit as the produce in our supermarkets and farmers markets will be priced on the same basis.

Only then will we really know which is really cheaper.

Welcome to the new Sustento website

It’s a new beginning but hopefully we can get some dialogue going here. The rules are simple: all comments are welcome but this isn’t a place for ranting and raving (there’s plenty of other sites for that); it’s a space for constructive conversation about a wide range of issues; papers, articles and any scraps of thought are welcome and if suitable i will gladly post them in the research section; if you want to post your link up then just let me know.

 Feedback is always appreciated.

Best wishes

Raf

The Next Generation of Search: mywebDNA

The web is an amazing resource with so much information at the touch of a button. But so much of it is rubbish and completely irrelevant. What if we could make search more relevant to the user by harnessing the power of the system itself? I’m not talking about recording your search history or your demographics. It’s more about who you are. You act as the filter and create a world that is relevant to you. It’s early days yet but the folks at VortexDNA have made a start.

A Cyberspace For You?
Tuesday, 1 May 2007, 10:40 am
Press Release: VortexDNA

A Cyberspace For You?

NZ Tech start up seeks volunteers to test an innovative Web hypothesis

Technology start-up VortexDNA is asking for volunteers to test the hypothesis that there is not just one Web.

Embedded within cyberspace, the organisation claims, there could be hundreds or even thousands of different web-worlds, each relevant to a group of people who share a similar outlook on life.

“This could lead to a profound change in the way we think about cyberspace and create a better web experience for everyone, “comments Christchurch-based VortexDNA director Branton Kenton-Dau.

Called the ‘MyWeb’ hypothesis, the idea of thousands of web-worlds embedded in cyberspace is now being tested.

“Just as Newton passed sunlight through a prism to discover the entire spectrum of colour, VortexDNA wants to pass Google search results through a prism of your ‘DNA’ to see if your purpose, values and life focus provide you with a better search result,” explains Kenton-Dau.

Internet legend Vint Cerf, currently Vice President and Chief Internet Evangelist at Google, said recently that there was still a problem finding relevant information on the Web. “My guess is that the next step in search will require making things more relevant, which may require things like the semantic web that Tim Berners-Lee has been working on,” he said.

“Making things more relevant is exactly what the My Web hypothesis is all about,” says Kenton-Dau. “Our aim is to prove that there’s a direct correlation between the web sites that interest you and the most profound definition of who you are.”
Downloading the MyWebDNA plug-in to the Firefox browser is easy, and no effort is required to use it—simply search as normal. Once installed, the plug-in circles the Google search results that are most relevant to the searcher.

The VortexDNA team says it already has statistically significant results and is now engaging with experts to review the findings before making them public.

“The experts can tell us if our math is right, but what we really want is users to tell us if we’re making a difference,” points out Raf Manji, Kenton-Dau’s collaborator. “The purpose of VortexDNA is to transform your experience of the web. The true test of our hypothesis is when you download the plug-in.”

The technology is completely anonymous, and VortexDNA doesn’t track the user’s search history in any way. They take the privacy issue very seriously.

Should the VortexDNA team succeed in discovering hundreds, or even thousands of web-worlds, the web experience will become more relevant for everyone—better news content, job hunts, dating partners, recipes, vacation ideas… the content of the Web could become ordered around an individual.

“We believe that until now the Web has been like a radio without the ability to tune into the different stations.” says Nick Gerritsen, another member of the VortexDNA team. “That means our experience of cyberspace to date has been mostly noise.” To demonstrate what they mean, the team have created a movie that can be viewed from the VortexDNA website: http://vortexdna.com/content/vortexdna-video.html.

Gerritsen, Manji and Kenton-Dau hope that the VortexDNA technology will provide the tuning knob to the radio—enabling people to find the Web content that is aligned with who they are. At present the technology is capable of identifying 78,125 different DNA types. “It’s a hypothesis,” says Manji, “that may just be web history in the making.”