Recent events in history have defied a lot of historic perceptions especially those to do with financial markets. The global crisis is seen by many as a menace that could have been avoided somehow.
The six billion dollar question is not why but for the most part, how. This comes at the blink of everybody’s hope and the saddest thing is that there seems to be way too many experts wanting to tell every how.
Well, the old adage of “in hinder sight every one’s vision is 20/20” holds true here. Every one has an opinion all of a sudden, every one seems to know something about the crisis and every one seems to want to offer solutions.
In revisionist history everything works that way for the most part but the real issues are left out and so the next old adage “if we don’t learn from history, we are bound to repeat it” holds true again.
Well, how then can we learn from such a very complicated set of events, that so many experts differ on? The real secret is hidden in some fundamentals … in financial services I learnt earlier on that an involved client makes very few financial mistakes.
Here at the Zambian Chronicle we have severely written about market conditions that led to the crisis and similar issues but what is of the essence in this week’s memo are the similarities the global economic crisis lend to normal living as individual, corporations and governments.
As a result we will look at these similarities and analyze them. We will do so while we try to avoid paralysis of analysis but systematically help drive the relevant points home. This is important because most times real issues get lost in over-simplifications and or over-exemplifications.
By contrast, financial markets operate on the notion of speculation, simply put chance … well all know games of chance have more losers than winners. This is true whether one plays the lottery or just goes to play the slot machines.
By nature speculative gains are never guaranteed, they are usually anomalies and or outliers. The central tendency is such that real winners remain in the median and such is real life. If individual(s), corporations and or governments left anything to chance, they are most likely going to be the victims as opposed to being victors.
Speculative scenarios by scenery exemplify the veracities of chance as we explained in our memo entitled America’s Economic Woes: What Went Wrong and What Lesson(s) Did We Learn? As a result the most important lesson here is never to leave anything to chance, one ought to know the details even if one is not an expert at least grasp the basics and never go into anything flying blind.
This is a life long principle and would save us all from future headaches and heartaches. Leaving nothing to chance entails we have to do our due diligence and spend time mastering the issues of life before they master us instead.
One of Africa’s biggest problems has always been that of expecting success without planning. Somehow we expect to wake up someday and every thing is alright, we envision a day when relief will suddenly come from somewhere unknown, poverty will end and our colossal problems solved.
That seemed to be the problem with Wall Street, with the underlying current moving in a different direction, there was hope somehow the markets would respond without new incentives because of Adam Smith’s invisible hand without planning.
Well, for the most part the only thing that began to be invisible was the latent wealth that was built on intangible assets in financial instruments. Before we all realized the markets in the US alone had lost over $3 trillion in asset values.
For a government part of planning comes in form of writing anticipatory legislation that stands the test of time, for a corporation part of planning takes work involving all stakeholders and looking at what the competition has to offer and how we can undercut them while for individual it takes real introspection and soul searching.
The planning process is probably the hardest part of the whole process of our living franchises. My dad always told me that if you fail to plan, you are in an essence planning to fail. No one comes up with an Exit Strategy without planning.
The Japanese realized this way ahead of others. One might say once beaten twice shy and that holds true for them, once they lost some much blood and treasure at Hiroshima and Nagasaki, they changed their ways forever.
Everything that turns out to be successful is a direct result of detailed plainning, for individuals, corporations and governements, please make no mistake about that.
Long time ago we took time to explain systems, how they work and what they are all about. For the sake of this memo we will try and explain them in short form. Systems are our creations, our physical structures, hybrid systems which include natural and designed systems, and our conceptual knowledge.
The human element of organizations and activities are emphasized with their relevant abstractness as well as representations. A key consideration in making distinctions among various types of systems is to determine how much freedom the system has to select purpose, goals, methods, tools, etc. and how widely that freedom to select distributed (or concentrated) factors exists in therein.
Since systems are human creations, they are bound to have flaws. In fact part of the reason the Soviet Union failed was not only that it was built on a flawed philosophy but that it was built on systems that could easily be undermined by a capitalistic enterprise.
Capital markets are systems that tend to be mastered, and without constant tweaking of what could work and what could fail, such systems develop flaws that lead to the collapse of the whole when left unchecked.
As an individual you avoid systematic failure by weaning yourself from the dependency of others, this can take a whole range of issues in your life. As a corporation, you avoid systematic failure by using among others the six sigma theory of continuous improvement, every thing in existence today can be improved on and as a government you avoid system failure by embracing entrepreneurship, science and technology to better the lives of the citizenry.
Systems can become absolute and without a mechanism in place that has the ability to measure efficacy, generations may pass if catastrophes like the global crisis never occurred before a society realizes there were actually flaws in the system.
The real technical aspects of mark to market could be very deep and since the essence of these memos is to make the complicated very simple for any layman to understand, we will try to break it down easily. This term originally stems from an accounting term in the generally acceptable accounting principles called the historic concept.
The underlying premise here is that all assets have to be recorded at historic value especially those in the PLE (plant, land & equipment) column of tangible assets on the balance sheet. Well, somebody smart wanted to delineate those from other assets and came up with the concept of “other assets” being marked to market.
These assets include things like stocks and derivatives (intangibles) but also things like mortgages since these tend to fluctuate depending on the market. For instance if Zambian Chronicle traded at Lusaka Stock Exchange, today’s closing price of the ZC stock may be different from tomorrow’s due to buy and sell pull volumes on two different days.
Also for mortgages, due to demand and supply conditions in certain markets, same size homes may sell differently in different markets. The concept goes further to other complicated variables used in marginal analysis similar to what we talked about in the Life is better lived on the margin; therefore, think on the margin … memo.
But to bring it closer to home, mark-to-market may even include one’s ability to only look at the here and now, seeking short-term gratifications at the expense of long-term benefits. Unfortunately, this was the loophole Enron used with all its Special Purpose Entities (SPE) creating value that was non-existence.
It was the same loophole used in the Mortgaged Backed Securities (MBA) that have left the whole world wondering what went wrong. It’s more like living one’s life by what is expediently in style today versus what is eternal, ethical and moral.
But above all, don’t forget to Live Long & Prosper … that’s this week’s memo from us at the Zambian Chronicle … thanks a trillion.
very insightful as usual, its amazing how we overlook important issues, thanks for the reminder.