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The Future of Investing- Part-1

April 9, 2009

In order for my quest to start developing my hypothesis for future of investing I was browsing the web, looking to find what some of the key brains are thinking.

PIMCO’s Bill Gross’s April outlook is that the future of investing will depend on the long-term future of the global economy – its nominal growth rate and the distribution of that growth between public and private interests. The future of the global economy will likely be dominated by delevering, deglobalization, and reregulating.

Whether evolution or revolution it is important to recognize that the aftermath of an economic and investment bubble transitioning from levering to delevering, globalization to deglobalization and lax regulation to reregulation leads to an across-the-board rise in risk premiums, higher volatility and therefore lower asset prices for a majority of asset classes.

Then as he bring home the point, to the investing and near term impact on 4 areas that he sees concern.

It seems to me, though, that one has only to ask what investments were positively affected by the previous long-term cycle of levering, deregulation, and globalization in order to imagine which ones will do poorly as the trends reverse. A short list might read as follows:

  1. The Dollar – As the center of structured finance and the shadow banking system, the dollar was bolstered as it sold paper to the rest of the world. To date, its recent strength seems counterintuitive. Weakness may more accurately describe its future.
  2. Credit – Lax regulation and increasing leverage squeezed risk premiums and spreads to historically overvalued levels. We are now moving in full reverse.
  3. Equity – In addition to the previous conclusions, it is evident in retrospect that narrow risk premiums in credit markets facilitated narrow equity premiums in stocks if only because they seemed cheap by comparison and allowed corporations to borrow cheaply and buy back their own stock.
  4. Emerging Market Globalization and lax lending standards re-rated emerging and developing country financial markets to unrealistic levels. Eastern Europe is likely the first to fall.

How about some other key brains. Here is a list of 20 principles for “Call to Action” from the panelist for a discussion organized by Wall Steer Journal. The panel included ex-Treasury Secretary Robert Rubin, ex-Fed Chairman Paul Volcker, financiers George Soros and Stephen Schwartzman, and Nobel Prize winner Myron Scholes. The group published “A Call to Action” that documents “20 principles for rebuilding the financial system”.  Download to read the 20 principles. Most about “Improve”/”Encourage”/”Publish”, etc.

Then here is Nassim Taleb, The Black Swan famed Author. He has a list of Top 10 Ten principles for a Black Swan-proof world. I don’t know if this doable, but sure he does command a following and a lot of people are interested in listening to what he thinks. Thoughts from Thought leaders! Poster quotes, not sure if practical. Anyways, nice quotes and a good core idea, we’ll see if some of these come into reality?

  1. What is fragile should break early while it is still small.
  2. No socialisation of losses and privatisation of gains.
  3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus.
  4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks.
  5. Counter-balance complexity with simplicity.
  6. Do not give children sticks of dynamite, even if they come with a warning .
  7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”.
  8. Do not give an addict more drugs if he has withdrawal pains.
  9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement.
  10. Make an omelette with the broken eggs.

Then here is Kevin Phillips, author of “Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism.” A year ago, he warned of a the pending explosion of a 25-year “multibubble” that started in the 1980s, when the financial sector accounted for 10 percent to 12 percent of the U.S. economy had started metastasizing into an “arguably crippling” 20 percent to 21 percent by the middle of this decade.

Overleveraging and easy credit was bound to create disaster, he warned. According to him

My theory is that if we are in a commodities cycle, what you will get will be more like 1973-74-75 … where as soon as the recovery begins you get rising inflation because you’re going to play havoc with all money supply and liquidity that’s been unleashed ” he added.

So here we we go, I picked-up a few points so far, de-levering, de-globalization, re-regulating and rising inflation, the quest is on to develop some investment themes. I shall be covering more in the next Part. If you have some additional ideas/thoughts/though leaders/reports you would like to share, pls add those. I shall delve into details and try to simplify it for you.

Profitable Trading, OP

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